Newly constructed homes are carrying a hefty premium over existing homes. The gap, which historically had been 15 to 20 percent, has in recent years widened to 30 to 40 percent. That suggests either existing home prices are much cheaper in relation to the newly built homes and/or that there is just not enough new homes being produced.
In the most recent monthly data, in November, the median home price of a newly constructed home was $280,900 while the median price of an existing home was $206,200. This gap is 36 percent.
Indeed, too few new homes are being constructed. Even though single-family housing starts are projected to have risen for the fourth time in the past five years, the level is essentially at a deep recession level. This year’s single-family housing starts look to hit 650,000. But the normal should be at least a million. Persistent underproduction of new homes is one key reason for pushing up prices. From 2004 to 2014, a typical newly constructed home price will have risen by 27 percent.
Meanwhile, a typical existing home price has risen by 25 percent in the past three years. Even so, the decade growth in home price, due to the downward correction that occurred during the housing bust, is only 8 percent. Over the same decade, from 2004 to 2014, a typical apartment rent grew by 31 percent. In other words, home prices are not rising too fast or to a new bubble. Rather, the shortage of new construction is leading to the premium on the new homes to expand.
If housing starts do not revive quickly and robustly then new home price premium could rise even further. NAR projects single-family housing starts to rise to 820,000 in 2015. That would be a nice growth and good news for homebuilders. Still it would be under the historical average.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.