New-Home Sales Are Climbing. Should You Join the New-Construction Trend?

New homes being built on a sunny day
Construction site of a house being built.

While the overall real estate market and home sales, just like most of the economy, has experienced a general decline in 2020, we have started to see positive trends, such as increased activity and a return of certain mortgage products.

An interesting trend, as reported by Mortgage News Daily, is an increase in new home sales. According to their report, the sales of new single-family homes have jumped 16% from the previous month, a sharp increase for a corner of the real estate market that had declined significantly since January.

This upward trend in new home sales could have an impact on homebuyers, sellers, and property investors.

Side note: Why are We Talking About May Stats in July?

It’s already July, so why are we talking about home sales all the way back in May? These numbers and statistics take time to gather and organize, so most housing figures are not available until roughly a month later. So as of early July, the latest numbers we have are stats from the month of May.

Why Did New Home Sales Climb 16% in May?

New existing home sales are often driven by similar factors. But there are, on occasion, factors that fuel the growth of one or the other.

Shortage of Existing Homes Placed on the Market

Perhaps the most significant driver of new home sales is the simple fact that people are not placing their homes on the market…at least not yet. Homeowners are still hesitant to place their home up for sale, and many would prefer to wait until the coronavirus pandemic has passed before making any decisions.

A report from CNBC states that sales of existing homes fell 9.7% in May 2020 compared to April of 2020. The article also says that inventories were low not only because people were waiting to place their home on the market, but because people who had listed their homes decided to pull the listing. Across the country, inventories fell 18.8% compared to the previous year. This reduction in overall inventory will inevitably create a demand for new homes; after all, if people can’t find an existing home to buy, why not purchase a new home?

“Urban Flight” Phenomenon

Another factor driving the increase in new home sales is the phenomenon called “urban flight.” Essentially, this is a trend of office, administrative, and other white-collar workers who can work remotely moving away from urban centers and into the suburbs and rural areas. Business Insider wrote an article focusing on urban flight, saying that this phenomenon was already in full swing before the spring of 2020. In the San Francisco area, for example, people were leaving “in droves” because of the extremely high cost of living.

Homes in a suburban neighborhood.
Many people are moving to the suburbs, leading to a surge in home sales for new construction.

With technology allowing for remote communication, and numerous companies and employees adapting to this form of work (and many finding it appealing), there has been an increase in people moving away from expensive urban centers. The trend is certainly driven by finances, but Mortgage Daily News also states the trend is driven by the coronavirus, as well as social unrest leading to destructive rioting.

What’s the Cost of Living in Urban Center

Everyone knows it costs more to live in the city than in the suburbs. But have you ever really looked at the numbers, especially for home sales?

“Cost of living” may be the most complex financial statistic ever conceived. There are just so many numbers to calculate in order to reach an accurate conclusion. If you want to be comprehensive, cost-of-living statistics should include prices for gas, groceries, taxes, furniture, home goods, electronics, and thousands of other price points. Of course, it should also include the cost of home ownership.

We won’t even try to calculate a full cost of living, but we can at least compare the prices for home sales (total price and cost per square foot) for central urban cities and their nearby suburbs.

To start, let’s look at the costs of homes in our little corner of the country, San Diego:

San Diego Metro Region:

San Diego

Lakeside

Escondido

El Cajon

Median Home Value

$679,568

$545,095

$553,421

$546,877

Median Price Per Square Foot

$487

$305

$304

$390

Of course, San Diego is not the only area where this trend plays out. Let’s look at the stats in Chicago, an areas with lower prices (compared to San Diego) but one that still shows the city-center/suburb difference:

Chicago Metro Region:

Chicago

Wheaton

Aurora

Naperville

Median Home Value

$249,152

$350,151

$212,018

$396,425

Median Price Per Square Foot

$243

$198

$133

$184

Chicago has an interesting trend, one that likely plays out in other areas. While the per-square-foot price is higher, the total cost is sometimes lower. This tells us that there are more condos, town-houses, and small homes for sale in the city, while the suburbs are dominated by large homes for growing families.

Overall, the result is fairly clear. People are, at least for now, moving away from the city centers and into smaller towns and suburbs. While you can find new residential construction in San Diego, Chicago, Los Angeles, Houston, and other urban centers, new homes are usually built in less-crowded suburbs. So it stands to reason that if more people are flying from the cities, new homes will soar.

Low Interest Rates Make New Construction Affordable

The other trend driving the increase in new home sales is lower interest rates, which allows people to spend more on their purchase. Zillow states that a new homes generally cost as much as 20% more than similar existing homes, so they need to find savings somewhere; current interest rates can often provide that cost reduction.

With lower interest rates, people can afford to purchase a new home with more size or modern amenities, such as smart security systems and energy-efficient features.

Creating Opportunities for Builders, Developers, and Investors Interested in the Trends for Home Sales

If you are considering the purchase of a new home, either one that is already built or one that has yet to break ground, let us help with your financing. We understand how to navigate the complexities of the new-home mortgage sector, so call now and put our expertise to work for you!

CONTACT OUR TEAM TODAY!

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