New Construction Home Prices Dip as Builders Focus on Affordability

The U.S. new construction housing market showed clear signs of moderating in the second quarter of 2019, with the median sale price for a new home experiencing a slight annual decrease. This shift indicates builders are actively adjusting their strategies to offer more affordable options in response to buyer demand, leading to a small increase in sales. This article breaks down the national trends and highlights key metropolitan areas to provide a clear picture of the evolving new-home landscape.

What Were the Key National Trends for New Construction?

In Q2 2019, the median sale price for a newly built home was $372,900, representing a 0.5% decrease from the same period in 2018. This follows seven consecutive years of price increases and signals a softening market. Meanwhile, sales of new homes saw a modest 0.8% year-over-year increase. This reversal in sales trends coincides with a 1% annual decline in the supply of new homes, the largest drop since 2013. Industry analysis suggests this moderation was an expected response to an affordability crisis, with builders pivoting to construct smaller, less expensive homes that are inherently less profitable.

How Did New Home Prices Compare to Existing Homes?

The price gap between new and existing homes narrowed. While new-home prices fell slightly, the median sale price for an existing home rose 3.2% year-over-year to $309,700. However, when analyzing price per square foot, new construction held a value of $175, compared to $180 for existing homes. It's important to note that price per square foot—a common metric for comparing property value—doesn't always provide a direct comparison, as new homes are often built in less expensive, outlying areas rather than established city centers.

Where Were the Most Significant Price Changes?

The national trend played out differently across the country. Of the ten metros with the highest new-home sales volume, prices were down in five and up in five, explaining the flat national average.

• Notable Declines: Significant price drops occurred in some of the nation's most expensive coastal markets. San Jose saw a 26.6% decrease, followed by West Palm Beach (-16.7%), Honolulu (-13.6%), and Miami (-13.5%).
• Notable Increases: The most significant price gains were in more affordable metros like Greensboro, South Carolina (+26.8%), El Paso (+12.8%), and Baton Rouge (+10.4%).

What Do Building Permits and Supply Tell Us About the Future?

Key leading indicators suggest a cautious outlook from builders. For all residential construction, building permits were down 3.4% annually, the second consecutive quarterly decline. Specifically, permits for single-family homes dropped 5.6%. This decline in new construction activity, coupled with rising costs for materials and labor, points to a continued tight supply of new homes in the near term.

Practical Advice for Home Buyers

For buyers considering a new construction home, this shifting market presents specific opportunities and considerations.

• Research Local Markets: National trends can be misleading. Investigate the specific dynamics in your target city, as conditions vary dramatically.
• Understand the Trade-offs: A new home may offer modern features and customization, but often at a higher cost per square foot and a location further from urban cores. An existing home might provide more established neighborhoods and character.
• Monitor Builder Incentives: In a softening market, builders may be more open to offering incentives or negotiating on price, especially in areas with increasing supply.
• Factor in Total Costs: While the sales price is key, also consider property tax—the annual amount levied by the local government based on the property's value—and homeowners' association (HOA) fees for certain types of properties like condominiums.

The data indicates a market in transition. Builders are recalibrating to meet demand for affordability, which has led to a slight dip in prices and a small boost in sales. While overall supply remains constrained, buyers in some markets may find more negotiating power and a greater selection of affordable new construction options.