The price of newly constructed homes refuses to budge downwards. After hitting the cyclical low of $204,000 in October of 2010, the typical transaction price of new homes has been around $220,000. In July, the median sold price of a new home was $222,000. Though construction workers’ wages have not changed in the past four years (stuck at $38 per hour on average), the costs of construction materials have been rising. As a result, homebuilders simply cannot lower the price without suffering a financial loss. That is, it is better not to build than to build and then have to slash the price.
Meanwhile, existing home prices have to respond to supply and demand pressures, and supply has so far had a better hand. As a result, lowering the price was the only option for many homeowners, other than pulling the home out of the market completely.
Due to the stubbornly high new home prices and lower existing home prices, the gap between the two has opened up. From consumers’ point of view, therefore, existing homes offer an increasingly better value. Because of this, we should expect new home sales to lag behind in the recovery as compared to existing home sales.
[...] Prices September 1, 2011 by Lawrence Yun, Chief Economist & Senior Vice President, Research · Leave a CommentFiled under: Existing Home Sales, Home Buyers, Home Price Measures, Home Sellers, Housing Market, [...]
In Boise, Idaho, I would offer a different explanation for the gap between new and existing home prices. Our market experienced some of the highest gains during the boom and biggest drops during the bust. We have one of the highest foreclosure rates in the nation. We’ve seen existing home prices drop throughout the past 12 months not because of an over-supply of homes but because of the downward pull foreclosures put on pricing. In fact, we have had for months now less than a six-month’s supply of inventory in most areas of Boise. If the laws of supply and demand were governing price, we should have seen steady increases over the past year. Instead, every time a bank lists a home 10-20% below the market, prices overall are dragged down.
Meanwhile, with record-low interest rates, buyers are willing to pay a bit more for new construction. They get quality homes in new neighborhoods that are filling up quickly. New subdivisions aren’t plagued by bank-owned properties. Supply and demand is very much driving prices in these areas.
My sense is that as foreclosures slow we will see rapid price shifts as our market re-adjusts to a true supply/demand curve. Prices in existing homes are artificially low right now. When the banks stop flooding the market with below-market pricing, we’ll see prices that reflect a “real” market.
Interestingly, once pricing rises, we’ll see fewer foreclosures which will strengthen our markets overall. Move-up buyers who are currently stuck in homes that are under water will be able to sell and buy. This, to me, is the best argument for loan modifications and foreclosure prevention. The sooner we have a market driven by supply and demand and not distress, the better off we all will be.
I BELIEVE THE REASON FOR SUCH RADICAL PRICING IS DUE TO BANKS NOT PUTTING MORE TRUST IN THE LOCAL AREA REALTOR’S PRICE OPINION AND INSTEAD GOING WITH THE UNEXPERIENCE ASSET DEFAULT SERVICERS OPINION. THESE SERVICERS ARE NOT LICENSED REALTORS AND HAVE NO IDEAL WHAT THE CURRENT SITUATION MAY BE EACH AREA. MANY OF THESE ASSET SERVICING COMPANY’S ARE IN OTHER CITIES 100/300 MILES AWAY OR EVEN OUT OF STATE. IN MOST CASES THE NEGOTIATORS HAVE NEVER BEEN OUTSIDE OF THEIR OWN TOWNS. THEY ALSO TEND TO STILL USE OUT OF TOWN APPRAISEL COMPANIES (TRYING TO SAVE $$$) ENDING UP WITH THE SAME RESULTS NOT KNOWING OR HAVING ACCESS TO THE LOCAL MLS REPORTS. I SAY THE BANKS NEED TO GET RID OF THE THIRD PARTY ASSET DEFAULT SERVICERS/WEBSITES. THE BANKS NEED TO HOLD ON TO THOSE COMMISSIONS AND PASS IT ON TO THE REAL HARD WORKERS DO THE RESEARCH AND ALSO PASSING SOME OF THE SAVINGS TO THE BUYER OR HELPING A CURRENT OWNER STAY IN THEIR HOME BY LOWERING THEIR PRICIPLES/INTERESTS. LET THE LOCAL AREA REALTORS DO WHAT THEY HAVE BEEN TRAINED/LICENSED TO DO. OF COURSE, WITH THE BANKS KEEPING A CLOSE EYE ON THE REALTORS ACTIONS EACH STEP ON THE WAY.
Dear TONIGIRL,
Please, turn off your CapsLock. Never mind that Internet etiquette frowns upon this practice, as it suggests you are SHOUTING, it also affects the spell checking function on your computer, so you end up with an irritatingly high number of spelling and grammatical errors.
It is clear that you strongly believe what you have to say is correct, and maybe it is, but you won’t be taken seriously when your whole message is written in capital letters.
Thank you.
I would be curious to know if days on market are also significantly different between new and existing homes.
Wow, its simply amazing at how quickly we get a response…. Not that I have received a response .. which I haven’t. And the issue still exists.. this is just lovely
Enjoyed most of the comment except for Joshmo, All had good strong points. Thanks.
Edith
[...] with new home constructions rates languishing near record lows. The most recent estimates from the National Association of Realtors (NAR) found that while the costs of new homes has fallen somewhat, they are still vastly more [...]