There’s been quite the shake up in the real estate market when it comes to new construction homes. So what’s the deal? Is the housing market about to be flipped on its head?
There’s no doubt that existing homes make up the vast majority of real estate transactions, and new construction on average accounts for only 10-12% of all single-family home sales. Surprisingly, however, the percentage of new construction homes sold nearly tripled from previous trends in 2024 and made up for almost one-third of home sales.
2024 saw near record highs in new construction sales at 28%, twice pre-pandemic numbers and outpacing the National Association of Realtors prediction for that year by over 13%.
With such a dramatic spike in sales I thought it might be a good time to revisit new construction in real estate, going over the pros and cons and understanding why the market is moving toward them and whether these previous years’ stats are just a blip in the matrix or the signal of big changes coming to the housing market.
Real estate, like car sales (used cars make up over three-quarters of all sales), is a market predominantly driven by existing products. Unlike retail, where brand new products make up for almost all sales, real estate relies heavily on people selling their existing homes.
But the real estate market post-COVID has had a difficult time keeping up with the overall demand for homes, and such an imbalance and lack of supply has incentivised investors and builders to venture into new construction.
Many factors contribute to market trends. For example, during COVID the Fed offered very low interest rates for homebuyers, helping to promote real estate sales and driving up prices. However, after the pandemic, rising interest rates have made homeowners more reluctant to sell, lowering inventory levels, spiking demand and causing real estate prices to soar.
In a market dependent on existing homes, a drop in seller incentive can really affect the market.
Another consequence of higher interest rates, however, was an opportunity for builders. To make up for lower inventory levels, builders could fill in the gap with new construction with the security of knowing there was a strong demand in the market.
These factors helped boost the percentage of sales for new construction single-family homes over the last couple of years. Although experts predict the growth will slow as interest rates decline and more homeowners are incentivized to sell, it’s clear that new construction will still continue to play an important role in the housing market.
With that in mind I wanted to turn toward some of the benefits of buying new construction. For the purposes of this month’s blog post, new construction refers to speculative building. This is when a builder constructs a home and sells the finished home to a buyer as opposed to a client buying land and paying a contractor to build them a new home.
I won’t spend too much time going over the obvious benefits of buying new construction, which feature new appliances, modern layouts, including more open floor plans, and don’t require any immediate updating.
It should be noted that new construction does come with risks. Keep in mind that buying a new home means you’re at the mercy of finding any mistakes in the construction of your home. Fortunately, most builders are required by the law to warranty their home for a certain period of time.
One of the more recent benefits of shopping for new construction homes is a rise in builder incentives to sell.
Incentives in new construction are the highest they’ve been in 5 years, according to the National Association of Homebuilders.
In August, two out of three homebuilders were offering some incentive for buyers – the most common incentive being a slash in sale price. Cuts in price averaged around 5%, which might not sound like much but can be quite substantial in a hot real estate market.
Any prospective homebuyer in Maine and New Hampshire over the last several years is familiar with the competitive market, going through crowded open houses and dealing with multiple offers, escalation clauses and even bidding wars.
Compared to those stressful situations the idea of a seller offering incentives, especially a price reduction, should be a welcome oasis to any prospective buyer.
What’s behind the incentive? It’s not a slowing market. It’s simply business. Builders aren’t typical homesellers needing to maximize their equity to buy a new place and make up for potential higher interest rates.
Builders are looking to maximize their profit, and the more days a new construction home sits on the market, the more money they lose – much to the benefit of the homebuyer.
New construction single-family homes can be a great option for many homebuyers. Staying flexible and vigilant in today’s real estate world is essential for success.
If you have any questions about new construction homes, real estate trends or your own real estate options, send me a quick hello!
