Greg Englesbe
Real Estate Investing

New construction homes for sale are a growing share of the U.S. residential market

The climate of high mortgage rates in the United States has left both home buyers and home sellers in different kinds of binds in 2022. Buyers face massive down payments and surging monthly mortgage costs, while sellers are pinched by a more tentative marketplace with dampened demand.

Even with mortgage rates climbing above 7% — the highest in more than 20 years — the relative scarcity of homes for sale has meant that prices continued to rise this year.

The median price of an existing home increased 8.4% from a year ago, reaching $384,800, according to September 2022 data from the National Association of Realtors. For newly constructed homes, the nationwide average sales price rose to $470,600, up about 14% from the previous year.

Recent data shows that a growing share of homes on the market are new construction, putting builders in a difficult position to offload them in the current atmosphere.

A report from Redfin this week noted that 29% of single-family homes for sale in the third quarter were newly construction, up from 25% during the same period last year and 18% in 2020. 

Part of the reason for the influx of new homes is that the country is seeing high rate of finishing construction since 2007, before the housing collapse and ensuing financial crisis led to a decade-long slowdown in home building. During the pandemic, when mortgage rates were historically low, builders spotted an opportunity to construct more homes — but now find themselves in a market that makes it tougher to sell these more expensive properties.

Redfins analysis pointed to significant numbers of new homes in markets that became “boomtowns” during the pandemic, but which are now seeing far less demand from buyers. These include locations such as El Paso, Oklahoma City, Omaha, Houston and Raleigh.

Stuck with homes they need to sell, builders have been offering buyers a number of incentives in order to defray costs. Some have offered to buy down a portion of the buyer’s mortgage rate, pay down closing costs and even offer free appliances.

“Builders are giving away everything but the kitchen sink to attract bidders,” Redfin agent Faith Floyd told Forbes. “I’ve seen at least one offer a $10,000 check for closing costs, a $3,000 gift card and a free fridge. This is one way builders will dig themselves out of the hole they’re in.”

The state of the market likely means that new home construction will slow down next year, but the cost of unsold new homes also will fall in many markets.

While the U.S. housing market certainly needed an infusion of new properties to alleviate the underlying supply problem, the larger macroeconomic picture has made the growth in new construction homes less stable for builders. Until mortgage rates fall, would-be home buyers are likely to remain skittish.

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