Buyers May Be Drawn to Discounts in New-Home Market

With builders touting more housing options and deals, aspiring home buyers may want to consider new construction.

As the resale housing stock remains tight despite recent progress in inventory levels, home buyers are discovering they may have more options by building new. New-home construction has accounted for about a third of the national single-family inventory since 2021, marking a sharp increase compared to the past four decades, according to The State of the Nation’s Housing 2024, a report released by Harvard University’s Joint Center for Housing Studies.

“There’s nowhere for [home buyers] to go except to turn to new construction” in some cases, Chris Herbert, managing director at JCHS, said during a press conference detailing the report’s highlights. The vast majority of existing homeowners have mortgage rates under 4%; today’s 7% borrowing costs, along with record-high home prices, provide less incentive to move.

Homebuilders may be in a position to better compete for buyers’ attention. “To improve affordability for buyers without lowering prices, large homebuilders increasingly offer mortgage rate buydowns: Home buyers who purchase a new home through a partnering lender benefit from an interest rate reduction paid for by the builder,” the JCHS report notes. Rate buydowns can offset higher interest rates and lower monthly mortgage payments.

Sixty-one percent of builders say they are willing and able to buy down mortgage interest rates to the 5% range, according to a builder survey conducted by Zonda, a construction research firm. What’s more, the majority of homebuilders in June said they used sales incentives to attract home buyers, according to a National Association of Home Builders survey. Nearly 30% of builders say they cut home prices to help bolster sales.

Sheryl Palmer, CEO of the homebuilding giant Taylor Morrison, said at the JCHS press conference that a builder can devote about $20,000 to buy down a home buyer’s mortgage rate. On the other hand, an existing home buyer likely would have to discount their home up to $60,000 to help the buyer achieve the same monthly payment that the builder could with the rate buydown. “The resale market is unable to compete like this,” Palmer said.

Building More Affordably

Homebuilders are building smaller, lower-cost options to help sway buyers, which has led to a significant boost in townhome construction. The number of new townhomes rose 5% year over year in 2023, reaching the highest level since 2006, according to the JCHS report.

Buyers want smaller homes chart from JCHS report

Smaller home options are helping new-home prices come closer in line to existing-home prices: The median new-home price in May was $417,400 compared to $419,300, which marked an all-time high for existing homes last month.

Builders also are increasingly focusing on the rental market because as home prices rise, many Americans are being priced out of homeownership. The number of single-family rentals rose 11% last year, the highest annual rate on record dating back to the mid-1970s, according to the JCHS report. Single-family rentals comprised 9% of new single-family construction, up from the historic rate of about 3%.

While builders are hoping to continue to ramp up construction, they still acknowledge plenty of obstacles, such as skilled labor shortages, restrictive zoning and rising material costs. Builders continue to look into alternative construction methods to try to lower costs, like modular and manufactured housing. They believe such alternative methods can provide a wider range of price points and in fill supply gaps, according to the JCHS report. For example, manufactured housing construction costs can be a mere 35% of an equivalent site-built home.

Building a Niche

Real estate pros are eyeing a new-home niche, believing the sector could be a bright spot for the housing market while current homeowners continue to wait out high mortgage rates.

A new-home niche may be particularly beneficial in a handful of markets that are seeing a boost in construction. The National Association of Home Builders recently reported that the following 10 metro areas have the highest number of single-family permits:

  • Houston-The Woodlands-Sugar Land, Texas
  • Dallas-Fort Worth-Arlington, Texas
  • Phoenix-Mesa-Scottsdale, Ariz.
  • Atlanta-Sandy Springs-Roswell, Ga.
  • Charlotte-Concord-Gastonia, N.C.-S.C.
  • Austin-Round Rock, Texas
  • Tampa-St. Petersburg-Clearwater, Fla.
  • Nashville-Davidson-Murfreesboro-Franklin, Tenn.
  • Jacksonville, Fla.
  • Orlando-Kissimmee-Sanford, Fla.

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