Today’s new construction homes become tomorrow’s housing market. Without affordable new construction, we find ourselves in a housing market marked by low inventory, high prices and bidding wars—and one where first-time homebuyers are often priced out.
The average price of a new construction home that sold in the three months through September1 was $374,000. Compared with existing homes, new construction homes sold at an average premium in September of $87,000.2
However, new home price growth has slowed throughout this year. New home prices are up 3.3 percent year over year, which is down from a growth rate of 5.3 percent in January. In contrast, existing home prices grew by 7.9 percent in September compared with 6.6 percent price growth in January.
The national average cost to a builder constructing a new home—which includes the estimated cost of labor plus materials—surpassed $200,000, or $240,000 for single-family units, in August this year, which is the highest since the Census began reporting it in 1988.3
“After almost a decade of underproduction, we are finally seeing a slow steady increase in single-family housing starts, up 9 percent from a year ago,” said Redfin chief economist Nela Richardson. “But high building costs are limiting the construction of homes that today’s buyers can afford. This is why even in the midst of extreme inventory shortages for existing homes, new homes are sitting on the market instead of selling.”
The labor shortage has been made worse by the recent hurricanes, though builders’ confidence has rebounded after a small dip in September. Renters in the rental market have suffered though as potential first-time buyers are priced out and continue to rent—rental vacancy rates hit a 31-year low last year.
Housing material costs have also been rising, with lumber prices recently hitting their highest level on record since January 2003. Prices will likely rise further as a new tax on Canadian lumber of up to 24 percent has been imposed by the Trump Administration.
If You Build It They Will Come
New homes represent a growing share of the market over the past five years—rising from one in 13 homes for sale in September 2012 to one in eight homes in September 2017. With high prices though, the growing share of new construction homes is worsening the housing affordability crisis as starter homes have disappeared.
“We would love to build more affordable starter homes, but when high-end homes cost the same to build and are far more profitable, we lose the incentive to build smaller units,” said Isaac Stocks of Azure Northwest Homes, a Seattle-area home builder.
California—the state most emblematic of the nation’s housing affordability crisis—has built the fewest number of apartments and for-sale units per new resident of all states between 2010 and 2016, with just one unit for every four new residents.4 This has resulted in a large number of California residents moving to other states.
Other states, by contrast, average more than double that at one new unit for every 1.8 new residents during this period, which is still lower than the 1.6 average of the 1990s (the housing boom of the 2000s averaged one new unit for every 1.4 new residents).