Price Premiums Grow for New Homes

By JUNE FLETCHER

Q. I'd like to buy a home this spring, and would prefer a new one over a resale. But in the neighborhoods I am interested in, new home prices seem to be going up, while resale homes still seem to be losing value. Why is that, and what, if anything, can I do about it?

--San Diego

A. The spread between new homes and existing homes is getting wider. The premium that new homes command over existing ones, which averaged 14% over the past two decades, is now double that, according to Goldman Sachs. In fact, the last time it reached this level was in 1991, another tough time for the housing market.

The main reason for that is, of course, supply. When the housing market tanked in the middle of the last decade, builders put away their shovels and hammers, and focused on unloading their spec houses through giveaways like free finished basements and granite countertops. Those measures worked, and inventory shrank rapidly—in fact, it's now at its lowest level in four decades. According to the latest figures from the U.S. Census Bureau, in 2010 the month's supply—that is, the amount of time it would take to sell off the inventory at the current sale pace—fell to 6.9 months in December from 9.1 months in August. Meanwhile, the supply of existing homes grew, swelled by foreclosures and short sales. Consequently, the new home supply as the percentage of total supply, which hovered around 15% in the early 1990s, is now roughly half that.

So now it's getting harder to find builders who are giving away incentives, and, as you've discovered, many are holding firm on their prices, or even raising them. The Census Bureau projects that the median new home sales price for December was $241,500, up from 8.5% from a year earlier. Meanwhile, according to the National Association of Realtors, the median existing home price dropped 1% year-over-year to $168,800 in December.

Those are the economic facts, and there's not much you can do about them—except wait. Although home builders have been occupying themselves during the Great Recession by buying land; raising new capital; and creating subsidiaries to do remodeling or to buy and sell distressed properties, soon they will have to start building again. For the best deals, concentrate your searches on big new developments where builders face a lot of competition; or conversely, on tiny infill enclaves in up-and-coming area where the competition is mainly from more modestly priced resale homes. Another tip: Either buy early, preferably pre-groundbreaking, when builders hold their grand-opening sales, or late, when they offer close-out specials.

And finally, if you can't find a new home you like and can afford, consider that in some neighborhoods, prices have come down so much that you can buy an existing home for less than its replacement cost. If you find such a deal, you can either renovate it or tear it down and build a new one, as your finances permit.

Write to June Fletcher at fletcher.june@gmail.com.