If you’re in the market for a home, it’s likely some of the properties you see will be new builds.
About 33.4% of single-family homes available for sale in the first quarter were newly built, almost double from pre-pandemic levels, according to a new report by Redfin, a real estate brokerage site.
“It doesn’t mean necessarily that new construction has ramped up,” said Robert Dietz, chief economist of the National Association of Home Builders. Home builders are still constructing about a million single-family homes a year, he said.
“What’s happened is that the level of resale inventory has shrunk,” Dietz said.
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Here’s what to consider during the shopping process, when you’re looking at a newly built home.
New builds may offer more flexible pricing
In a housing market that is plagued with low supply, buyers have been turning their attention to new construction because “there’s more opportunity,” Nicole Bachaud, senior economist at Zillow Group, recently told CNBC.
Unlike existing-home sellers, builders are typically more flexible when it comes to pricing. Builders can also offer buyers incentives like rate buy-downs, price cuts and covering closing costs, experts say.
A little less than two-thirds of builders are using some kind of incentive to promote sales, Dietz said. Those can include amenity upgrades, mortgage rate buy-downs and some limited price cuts.
Only about a quarter of builders are actually using a price reduction, said Dietz. And those price cuts average out to be around 5% to 6%.
The price gap between existing and new homes
The median sales price for new houses sold in the U.S. during March was $430,700, according to the latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
While new builds are still sold for slightly more than existing homes, the price gap has significantly narrowed.
“Prices are much closer to parity than during any point in the last three decades,” Matthew Walsh, assistant director and economist at Moody’s Analytics, previously told CNBC.
Over the last six months, the median price for a new home is only about 4% higher than the median price of an existing house. That level is significantly lower than before the pandemic when the median price of a new home was more than 40% higher than an existing house, Walsh said.
The low supply of existing homes has caused prices to tremendously grow while prices for new builds tend to move based upon interest rates, housing demand, the amount of competition for existing homes, and the cost of construction, Dietz explained.
What to keep in mind when buying a newly built home
If you decide to look into new construction, keep in mind that only about 10% of new homes available for sale are completed and can be considered move-in ready, Dietz said.
The bulk of new homes available can range from empty lots that are ready to be built on, to homes in different stages of construction, he said.
Today’s buyer needs “to be strategic, patient and flexible,” said Dietz, from considering different kinds of housing and locations, to making design decisions.
Here are four things to pay attention to:
1. Consider a smaller house: Since 2021, homebuilders have been building a “slightly smaller product” to deal with the lack of affordability, said Dietz. Reducing the square footage of your home can help reduce construction costs as well as utility and maintenance costs down the line. Townhouses made up almost 18% of single-family housing starts for the first quarter of the year, according to NAHB data.
The size of new single-family homes continues to shrink: In the fourth quarter of 2023, the median single-family square floor area came in at 2,156 square feet, the lowest reading since the beginning of 2010, the NAHB found.
2. Be open about geographic location: New construction can be cheaper in more rural areas, Dietz said.
“Whether it’s lower regulatory costs or greater land availability, that can be a smart move,” he said.
3. Keep construction costs down: Major factors like lumber and labor costs significantly impact the cost of a new house. But, as the future owner, you have control over the finishes added to the house. And depending on the kinds of materials you add to the house, builders are “adding up the tab,” Veronica Fuentes, a wealth management advisor based in Washington, D.C., previously told CNBC.
To save on costs, focus on completing the structural elements of the house and stick to basic or lower cost features during construction.
4. Be mindful about future costs: Allow room in your budget, as some costs can significantly change after the first year of owning a new build. For example, property taxes on newly built homes tend to increase dramatically after purchase because the initial rates are often based on estimates.
Make sure you research how often the county you’re considering reassesses property taxes and what that formula is based on.
But keep in mind that there can be other savings that offset those costs.
“When you’re buying a newly built home, you’re typically buying a home that’s more resilient, more energy efficient,” which can mean lower operating costs over the long run, Dietz said.