By Rob Jafek | Boomerang Capital Partners, LLC
New builds are different than existing homes, no argument there. The obvious differences associated with ‘new’ builds create a premium that buyers have been willing to pay for over the years. However, that perceived premium has now vanished and nationally the average price of a new build is the same as the average price of an existing home. This is quite notable given that this premium, or gap, has been both large and persistent, averaging about $60,000 for the last 10 years.
And comparing new builds to existing homes is not exactly an apples-to-apples comparison. The new build market historically offers more of a premium product, with higher square footage, higher quality finishings, and more features. However, that mix is changing, with realtors and builders now focusing on first-time home buyers, enticing them to buy existing homes with lower price points, and fewer ‘premium’ features. Home buyers should expect smaller square footage, smaller lots, vinyl countertops, and more carpet/less hardwood floors in this upcoming class of new builds – all of which will cut into the “premium” of premium.
But that doesn’t explain everything. Home builders are now finding themselves with too much inventory of that ‘old’ kind of new – lots of premium features at a premium cost — and as such they are cutting prices. Their strategy to move inventory doesn’t just include a straightforward reduction of price, but also offering incentives such as free upgrades, rate-buydowns, lower commissions, reduced fees, etc.
This is not just a national phenomenon; the dynamics are playing out here in Phoenix. While new builds remain at a significant premium, when looking just at the price, adjusting for square footage shows new builds selling at very close to the same price as existing homes: $242 per square foot for a new build versus $245 for an existing home. New builds at anywhere near the same price as existing homes are not something we’ve seen in The Valley for quite some time.
The idea that a large premium for a new build will return anytime soon would not be supported by looking at inventory. According to New Home Source, in October of 2022, there were 888 new builds for sale in the Phoenix area, and today there are 2,016.
While investors (aka ‘fix and flippers’) might feel bad about the fact that they can’t offer incentives in the same way that builders can, they should feel very good about the ‘apples-to-apples’ comparisons. Existing homes have so much going for them in the current market. They sit on larger lots and have feature sets that are still quite rich, such as the hardwood floors going in (and none of those icky vinyl countertops), and mature plantings. Additionally, they are all closer in proximity to places of employment and community amenities than new builds. Investors that we are familiar with are happy to have their finished product compared to new builds and the market seems to have come around to the same conclusion.