Thursday, April 21, 2011

-New Home Price Premium

The residential real estate market is challenging, but buyers can often get a lower price and better terms if they are a skillful negotiators.

Newly constructed homes command higher prices than existing homes. Newer appliances, newer building materials and such, plus the new homes being generally larger-sized, account for most of the difference. Historically the premium of new home price above existing home price has been about 15 percent. However, recent price data say that the premium has risen to 45 percent. That is, the median price of new homes in January was $230,600 versus the median price of existing homes of $157,900. The much lower existing home price is partly due to distressed home properties on the market that are selling for much less than the replacement cost. Still, the exceptionally large price differential between new and existing homes may imply that either new home prices have to fall or that there is good growth potential for existing home prices.

The ratio of the new home price over the existing home price is shown in the graph above.

-Lawrence Yun, Chief Economist & Senior Vice President, Research 

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