For a society that likes shiny new things, the latest research from the National Association of Home Builders (NAHB) could foreshadow a surprising trend – homebuyers choosing older homes over new construction.
Why? The median new home today costs 29% more than the median existing home, or two times more than the historical difference, according to the National Association of REALTORS®.
A wave of foreclosures has lowered the cost of buying an existing home, causing new home builders to slash production and home sizes. At the peak of the housing boom, the average size of a new single-family home topped out at 2,521 square feet. Since 2008, home sizes have steadily declined to 2,152 square feet, as of 2010. All room sizes are smaller, except the family room, the only room expected to upsize by 2015, say NAHB researchers.
Existing home values are down approximately 30% from the peak of 2007, enabling buyers to get a larger pre-owned home for less money.
Stricter financing
A new home with a higher price tag may be harder to finance. Stricter lending requirements mean that borrowers have to stay within traditional guidelines of affordability, including down payments and debt to income ratios. An affordable home should not take more than approximately 30% of household gross income to cover mortgage notes, taxes and insurance.
Wealth effect is gone
Despite recent gains in the stock market, people simply don’t feel as wealthy. Returns are about where they were 10 years ago, meaning a lost decade of wealth-building in stocks and bonds as well as housing equity. Without equity, it’s harder for current homeowners to move up to a more expensive home.
Higher building costs
While construction costs fell during the recession, the producer price index, published by the Bureau of Labor Statistics, says building material prices gained 4.5% in 2010. Today, building materials account for three-fifths of the price of a home, says the NAHB, compared to nine years ago when materials were half the cost of a new home.
Commutes more expensive
Most new homes are built where land costs are cheaper, well outside the inner city. The Department of Energy expects commuters to pay an average $700 more annually in gasoline costs. The cost of commuting could make older homes in the inner city, walking communities, and homes near public transportation more attractive to buyers.
Where new homes beat older homes
Because it’s easier to build green than to retrofit, new homes have the advantage over older homes when it comes to energy efficiency. Sixty-eight percent of homebuilders say the home of 2015 will have more energy-efficient features such as insulated windows and water-efficient fixtures, and Energy-Star-rated appliances, heating and cooling systems.
Whether homebuyers choose new or existing homes this spring, one thing is certain- they can’t go wrong either way. In an inflationary environment, buying a home is one of the best hedges against rising rents and higher building costs down the road.
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