Why New Construction Homes Are Gaining Market Share Despite Higher Costs

New construction homes reached their highest market share in years during late 2017, representing a critical but insufficient response to the severe housing shortage. While these homes carry a significant price premium over existing homes, buyers are increasingly drawn to them to avoid competitive bidding wars. However, major obstacles—including labor shortages, rising material costs, and limited land availability—continue to hinder the construction needed to meet demand.

What Was the State of the New Construction Market in Late 2017?

In the fourth quarter of 2017, new construction homes accounted for 16.4% of all single-family homes for sale, the highest level since tracking began in 2012. The median sale price for a new home was $377,800, which was approximately $86,400 higher than the median price for an existing home. This price premium exists even though the year-over-year price growth for new homes (1.6%) was much slower than for existing homes (7.3%).

Based on our experience assessment, buyers in highly competitive markets often view new construction as a way to sidestep bidding wars. Negotiating with a single builder can be a more predictable process than competing with multiple offers for a pre-owned home.

Why Are New Construction Homes More Expensive?

A key driver of the high cost is record-breaking construction expenses. The estimated cost for labor and materials to build a single-family home rose to $244,000 in Q4 2017, the highest level reported in decades. Several specific factors contribute to this:

• Labor Shortage: A 2017 survey by the National Association of Home Builders (NAHB) found that 82% of builders cited labor cost and availability as their top concern. The industry had not yet recovered the 1.5 million jobs lost during the Great Recession.
• Lumber Prices: Lumber prices peaked in early 2018, up 45% year-over-year, partly due to tariffs on Canadian lumber, which supplies one-third of the US market.
• Regulatory Costs: A study by the NAHB found that regulatory costs from various government levels accounted for 24.3% of the final price of a new home.

What Major Challenges Are Preventing More Home Construction?

Despite strong builder confidence, the supply of new homes remains well below historical averages. The following challenges are hindering construction growth:

• Land Shortage: The cost and availability of developed lots was a major challenge for 65% of builders heading into 2018. Zoning restrictions further limit where and how homes can be built.
• Limited Credit: Following the recession, lenders favored multi-family projects, which were perceived as less risky than single-family home construction. Although lending conditions had eased by late 2017, they remained relatively strict.

Which U.S. Metros Had the Most Active New Construction Markets?

Market activity varied significantly across the country. The following table highlights key metrics for selected metropolitan areas in the fourth quarter of 2017.

In contrast, markets like Buffalo, NY, and several in California had less than 3% of home sales coming from new construction, indicating severe supply constraints.

What Is the Outlook for New Construction and Affordability?

To address affordability, some industry experts point to building more townhomes. This style of construction makes more efficient use of limited land and can add homes in a more moderate price tier. The key question is whether local communities will permit the increased density that townhouse projects require.

While new construction offers a path to avoiding bidding wars, its higher upfront cost and the systemic barriers to building more homes mean it is not a complete solution to the housing shortage. Buyers should weigh the convenience against the significant price premium.