New construction may be the best value right now

Even more surprising than the shrinking price disparity between new and existing homes is that, in May and June of 2024, the median sale price of new homes was actually lower than that of existing homes.

In May, the median sale price of a new home was $408,300, 2.1% lower than an existing home at $417,200. In June, the median sale price of a new home was $416,700, 2.4% lower than an existing home at $426,900.

As noted in the introduction, by July 2024, the percentages had flipped back to the norm, with the median sale price of a new home being 1.7% higher than an existing home.^Footnote4

Were the two months when the median sale price of a new home was less than the median sale price of an existing home an anomaly or part of a growing trend? At the moment, that answer is unclear. At the time of writing this article (September 2024), the August 2024 numbers have yet to be released, and even when those numbers are released, it will take many more months — if not years — to determine whether this trend has legs.

Regardless of whether median sale prices of new homes continue to dip below those of existing homes, the ever-closing gap in disparity between the two has made new construction a viable option for more potential homeowners than at any point in recent history.

On top of that closing price gap, home builders are frequently offering incentives to ease the financial burden on potential homebuyers. These incentives^Footnote5 include:

• Covering closing costs, which usually amount to 3% to 6% of the home’s price.
• Free upgrades, including deluxe appliances, higher-quality countertops and fancy fixtures.
• Special financing opportunities, such as interest-rate buydowns and low-down-payment financing.
• Good Builder Warranties, providing homebuyers with peace of mind knowing their home is covered for more than the typical six-month to two-year window.

With the price difference between new and existing homes having dipped to less than 2% recently, any one of the above builder incentives—much less a combination of two or more — could tip the scales in favor of a new home being the better value.

Since house prices and mortgage rates have remained high, potential homebuyers are looking for any advantage they can find, and, in this moment, new construction may give them the financial edge they’re looking for.

One of the plusses of new construction is that, with brand new materials and mechanical systems, repairs shouldn’t be necessary for several years.

Another plus: Since new construction is built to the latest building codes, those homes are made with more energy-efficient materials, windows, appliances and HVAC systems — keeping utility bills lower.

The last plus is the level of safety. Again, since new homes are required to comply with the latest building codes, they should be more structurally sound than many older homes.

According to Freddie Mac data, mortgage rates fell to 6.09% for the week ending on September 19, 2024 — 1.7% lower than the 7.79% peak in October 2023.^Footnote6 That 1.7% drop would translate to a significant decrease in the monthly mortgage payment of prospective homebuyers.

Even more promising is the Federal Reserve cutting its benchmark interest rate by 50 basis points (0.5%) at its September meeting. This marks the first time in four years that the Fed cut a key interest rate that has a potential influence — albeit indirectly — on mortgage rates.^Footnote6

Some forecasts predict mortgage rates could drop below 6% in the final quarter of 2024 or the first quarter of 2025, possibly dipping to the mid-5% range by mid-year, which would allow even more potential homebuyers back into the fold.

It's unclear how this drop in mortgage rates will affect the median sale price of new and existing homes in the near future. In a typical market, a drop in mortgage rates usually leads to a rise in home prices, but with the current inventory drought still tempering home prices, that may not be the case in the short term.