National Housing Market Outlook

New Homes Too Expensive For Most Buyers

Erik_Franks_web

Erik Franks

January 28, 2015

New homes failed to gain much market share last year, which can be partially explained by looking at two factors in more depth:

1. A shift in the preferences and demographics of current first-time home buyers

2. The pricing spread between new and resale homes

Demographics

Many of today’s first-time home buyers value living closer to their jobs and retail, partially because fewer of them have a stay-at-home parent. Since the affordable new home developments tend to be built in outlying areas, they are less appealing to today’s young buyers. and although millennials prefer new—especially with the latest technology, this same group is also strapped with unprecedented amounts of student debt, which diminishes their buying power.

Pricing Spread

While a number of home builders are traditionally known for building entry-level homes, those builders have really always focused on the more affluent first-time buyers. These buyers have traditionally been willing to trade some commute time to get a brand new home, which is almost always more expensive than most of the resale homes sold in the market. A the price difference between new and resale homes has increased to an all-time high, more first-time buyers are being priced out of the new home market.

Most people cannot afford a home that is more expensive than the median-priced home in a market (the price where 50% of the homes sold are more expensive, and 50% are less expensive). That is one reason why 92% of all the homes sold in 2014 will be resale homes.

The following chart is one we produce each month that compares the price of the median resale home to the average sales price reported by the larger publicly traded builders. Every single home builder’s average sale price exceeds the median resale home price by at least $68,000. While comparing medians and averages is a bit apples and oranges, rest assured that the vast majority of new homes are priced well above the median resale home.

*The average median price is weighted by community count.
**The average selling price is from the most recent quarter.

In the future, as millennials get older, make higher incomes, and pay off their student debt, the demand for new housing will increase, and more will buy on the outskirts—particularly if they can capitalize on the growing trend to work from home. Over time, we expect the new home/resale home price gap to narrow.

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About The Author

Erik Franks
Senior Vice President, Research and Technology
Erik leads JBREC’s Burns Interactive Dashboards team, and continuously looks for ways to improve how JBREC distributes research to clients. He also helps build new proprietary indices to help JBREC’s clients make sense of a tremendous amount of economic and housing data.

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