National Housing Market Outlook

New Home Premium Volatility

June 20, 2018

Hot, cold, medium? It is time to revisit one of our findings from last year’s white paper that evaluated 36 California new home infill communities in both hot and cold housing markets. We learned that the new home premium varies dramatically during the housing cycle, especially in infill locations. Our experience in other markets tells us that holds true there as well. See our current market ratings below.

When the market is hot, as characterized by strong sales and above average price appreciation, builders can achieve new home premiums that are (all other things being equal):

  • Up to 25% higher than normal for detached homes
  • Up to 30% higher than normal for attached homes

Conversely, while new homes still achieve premiums over existing homes in cold market conditions (slow sales, weaker pricing power), the new home premium can be upwards of 30% below normal for detached homes and as much as 40% below normal for attached homes.

While market timing makes a huge difference in achievable new home premiums, other factors also have a big impact, including: the age of the housing stock, community amenities, and in attached neighborhoods, the type of parking. Adjacent uses also make a big difference.

At this time, we rank 32% of all major markets in the country as Strong or Very Strong, equating to hot markets where builders likely have the ability to push the new home premium above normal for that market area. 60% of all markets are currently experiencing what we would consider to be Normal conditions. Only four markets are currently Slow. Sorry, but the achievable new home price premium in those markets is still likely below the long-term normal.

Builders working on their grand opening prices today or looking at future deals need to pay close attention to today’s market strength. In a hot market, builders can push the new home premium higher than usual. In a cold market, the premium will be less than usual.

For the strength of your market, and particularly your submarket, please contact one of our consultants. We work with builders and investors to help them make well-informed decisions regarding the pricing potential of new home projects.

New home vs. existing home premiums quoted in this article are based on an analysis of new home prices at projects in California during different times in the housing cycle over the last 15 years. Achievable premiums in other markets likely will be different.

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