It’s no secret that the U.S. housing market is starved for inventory. As of February, there were just 870,000 housing units available for purchase, according to the National Association of Realtors (NAR). That represents a mere 1.7-month supply, well below the four- to six-month threshold needed to create a more equalized housing market.
Of course, there are homes to be had for buyers and real estate investors who are willing to stretch their budgets. But we’re talking about a potentially big stretch.
The reason? As of the end of 2021, more than 34% of available homes for sale were of the new construction variety, according to Redfin. That’s up from roughly 25% a year prior and the highest share of newly built homes on record.
The upside of new construction
There are benefits to purchasing new construction that both everyday buyers and investors can benefit from. For one thing, buying new construction means getting a home in pristine condition that shouldn’t need any immediate repairs.
Also, many new construction homes allow for some degree of customization. That gives buyers and investors the option to have a say in the design process.
From an income property standpoint, new construction can serve as a great marketing tool. At a time when rental demand is high, investors may be in a position to command even higher prices by offering up new construction for tenants to live in.
The downside of new construction
While new construction has its perks, one major drawback buyers are apt to encounter is cost. Redfin reports that the median sale price of a new construction home was $377,700 in December. That represents a 3.4% year-over-year increase. By contrast, in February, the median existing home sale price was only $357,300, according to the NAR.
New construction can also be problematic for buyers who get in during the building phase. Extensive delays can push off new construction closings, making it harder for buyers looking to occupy those homes to firm up their housing plans. And some new construction contracts can stick buyers with higher costs if builders incur added expenses during the construction process.
Then there are property taxes to think about, which are a large expense for everyday buyers as well as investors. New construction homes tend to get assessed at higher values than comparably sized and updated existing homes within the same location. The result? Higher tax bills.
Finally, while new construction homes tend to come with less maintenance and fewer repairs initially, many newer homes are constructed with builder-grade materials that don’t always hold up well over time. That means buyers of new construction could face costly upkeep down the line.
To be clear, there’s housing inventory available other than new construction in today’s market — but there’s not a lot of it. Those who are eager to purchase a home in the near term may need to consider buying new construction — even if that means stretching a bit outside their financial comfort zone.