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A pre-pandemic surge in homebuilding, record-low mortgage rates, and a shift in buyer preferences toward the suburbs are driving a significant divergence in the U.S. housing market. Sales of new-construction homes are now growing at nearly double the rate of existing-home sales, with new builds making up a record one-in-five homes for sale due to a relatively less severe inventory shortage. This article breaks down the key factors behind this trend and what it means for buyers and the market.
The inventory of both new and existing homes has declined sharply. The supply of new-construction homes for sale dropped 28.4% year-over-year in July, while the inventory of existing homes fell by a record 37%. This overall shortage is intensifying as record-low mortgage rates drive unprecedented buyer demand. However, the shortage of new homes is less severe because of a significant increase in construction activity just before the COVID-19 pandemic. This has created a market where newly-built homes represent a larger share of the available inventory, providing more options for buyers in that segment.
Several key factors are fueling the preference for new homes. The pandemic has accelerated a trend toward suburban living, where there is typically more available land for development. Furthermore, buyers are attracted to the possibility of customizing a new build and avoiding the potential maintenance issues of an older home. Economically, low mortgage rates have increased purchasing power, making higher-priced new homes more accessible. As noted by a senior economist, "the coronavirus pandemic is fueling interest in the suburbs—where there tends to be more space to build new homes."
There is a significant price gap between new and existing homes, which influences their respective markets. In July, the median sale price of a new home was $375,000, reflecting a modest 2.3% year-over-year increase. In contrast, the median price for an existing home was $308,000, after a sharp 9.3% increase. Existing homes are typically more affordable, making them highly desirable and explaining their faster price growth. New construction homes, while more expensive, offer modern amenities and designs that justify the premium for a certain segment of buyers.
| Metro Area | New-Home Sales Growth (YoY) | Metro Area | Largest Price Increase (YoY) |
|---|---|---|---|
| Baton Rouge, LA | +103.1% | West Palm Beach, FL | +41.3% |
| Worcester, MA | +71.9% | Los Angeles, CA | +28.3% |
| Cincinnati, OH | +69.5% | Cleveland, OH | +24.6% |
| Source: Redfin July Market Data |
The growth in new-home sales is not uniform across the country. Markets like Raleigh, North Carolina, saw new construction make up a third of all homes sold, while in Newark, New Jersey, the share was just 1.3%. Looking forward, residential construction projects surged 23.4% in July, and building permits jumped 9.4%, indicating a pipeline of new inventory. However, a major challenge has emerged: a lumber shortage has driven prices up more than 100% since mid-April, which could lead to construction delays and higher costs for future new builds.
For buyers considering a new construction home, it is crucial to:
