Major Pricing Changes In New Homes

Dated: 01/20/2019

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  • A greater share of newly constructed homes for sale had price cuts in the fourth quarter of 2018 (25.1 percent) than in the first quarter (19.2 percent).

  • In nearly all major metros, the share of newly constructed homes for sale that experienced a price cut grew in 2018.

  • Slowing home value growth, rising interest rates and increased inventory contribute to this trend.

Home shoppers across the nation may have an easier time finding a deal on a newly constructed home than they did a year ago. In nearly all major metro areas, the share of newly-constructed homes for sale that had their price cut at least once increased in 2018, in some cases by substantial margins.

In the fourth quarter of 2018, more than a quarter (25.1 percent) of newly constructed homes listed for sale had their list prices cut at least once – up from 19.2 percent in the first quarter 2018. That’s far higher than price cuts in general. In November 2018, for instance, 16.3 percent of all listings – not just new construction – experienced a price cut.

Price cuts, in general, did become more common in 2018, especially at the high end of the market. Many newly constructed homes are listed in these pricier segments, in large part because of market dynamics including high and rising building costs.

Three major factors contributed to the increase in price cuts, particularly for new construction:

  • Home values continued to grow in 2018 and now sit at their highest level in history. The nation’s median home is now worth almost 1.5 times (49.8 percent) more today than it was at the height of the recession — although the growth rate of home values has slowed in recent months.

  • Next, mortgage rates. After spending the last five years fluctuating at historically low levels, rates rose in 2018 to their highest point in more than seven years, before pulling back in the last few weeks of the year.

  • An increase in for-sale housing supply toward the end of 2018, largely driven by new construction. New home building crept upward for most of the past few years, although around the end of 2017 and the beginning of 2018, permitting activity began to slow, especially for single-family homes.

The cumulative build-up in home values and rising mortgage rates eventually caused housing demand to fall. Teamed with increases in housing supply, those factors appear to have impacted the housing market for both buyers and sellers. As home value growth slows, the prospect of buying a new home becomes less attractive, because the return on investment becomes less of a sure thing. This feeling is exacerbated by rising mortgage rates. As rates increase, homeowners are less likely to take on new mortgages and buy new homes, instead opting to stay put in their current homes at presumably lower rates.

Rising mortgage rates also affect affordability – the share of income that a homeowner must put toward a mortgage. Despite record-high home values (that by most measures have grown faster than incomes) that mean daunting down payments for many buyers, the share of income a typical U.S. homeowner spends on her mortgage remains below historic levels, as low rates have kept mortgage payments subdued. Rising rates would change that for the worse.

However, this phenomenon of price cuts could be short-lived. Mortgage rates softened in the final weeks of 2018, offering some hope to both buyers and sellers. Should they stay put, these relatively lower rates will provide an important test of exactly how much higher interest rates weighed on home sales and added to the frequency of price cuts last year. What’s more, with single-family home starts having pulled back, there should be fewer new homes for sale in the coming months, resulting in a more competitive market that may push prices up.

Of the nation’s 35 largest markets, the share of newly constructed homes experiencing a price cut increased the most in pricey tech hubs. In San Francisco, 37.2 percent of newly constructed homes on the market experienced at least one price cut in the last quarter of 2018, compared to 12.2 percent in the year’s first quarter — a 25-percentage point increase over the year. By comparison, in November 2018, just 13.3 percent of all listings in San Francisco had their prices cut at least once. Other technology hubs, including Seattle (+19.9 percentage points) and Denver (+19 percentage points), experienced similar trends. In the last quarter of the year, 40.3 percent of new construction listings in Denver had at least one price cut, the most of any metro at any time during the year.

Las Vegas also saw a sharp increase, with the share of new construction with a price cut spiking from 8.1 percent in the first three months of 2018 to 27.3 percent in the last three months.

Not all markets experienced this phenomenon, however. In Pittsburgh, San Antonio and Austin, Texas, price cuts on newly constructed homes were less frequent at the end of the year than they were at the beginning. Austin saw a sharp increase in this rate during the middle of the year, but it had fallen again by year’s end.

Original article by Zillow Group


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