In a brief departure from the Back to the Future Series (Fan and Midlothian have been studied thus far), this post will offer some insight into the new home market in suburban Richmond. While there are a million questions that can be asked about the new home market, we decided to tackle a relatively easy and straightforward one:
“What is the price difference between NEW homes and RESALE homes?”
Last night One South Realty was a sponsor of the MAME Awards for marketing excellence in the new homes industry. Organized by HBAR, the MAME awards brought together builders, developers, sales teams and Realtors under one roof to honor one another for jobs well done. While there is no doubt that the times have been challenging for builders and the results from 2012 seem to indicate the worst is in the rear view mirror, I cannot help but wonder what opportunities were missed and how much ‘caution’ drove the decisions made by the building community. It struck me that the builders and marketing folks in the room should have been giving out awards based on highest profit per unit and not most units sold. I would be curious to see if the awards would have been given to the same people … but I digress.
The New Home Premium
In order to look at the difference between NEW and RESALE, we had to establish a data set. For this analysis, we looked at homes tagged in the CVR MLS as ‘New/Never Occupied’ versus homes tagged as ‘Resale’ but built no later than 1990 as to compare somewhat similar housing styles and materials. We examined only MLS zones 34 and 62 (as these two zones have a high percentage of new home sales in the data).
So here goes…
The price difference per square foot of NEW versus RESALE:
- 2008 +9.7%
- 2009 +5.4%
- 2010 +4.9%
- 2011 +8.3%
- 2012 +9.6%
- 2013 +14.1%
This is measuring the difference between the value of a new home and the difference in a resale home by measuring the per square foot difference between the two. In effect, in 2011, the market paid an average of $111 for every square foot of previously owned housing and $121 for every square foot of new housing.
The Recession Impact
It should be noted that the market in Richmond really began to fall in earnest in 2008. As the market fell and foreclosures and REO property became a higher percentage of the market, the larger homes that were built but unsold were sold at steep discounts. The gap in per foot values fell by close to 50% from 2008 to 2010 as the larger ‘McMansions’ cleared the market at steep discounts driving down the gap. Likewise, the builders who were able to keep building began to built a far more stripped down model of home with fewer upgrades than before also driving down the gap between new and resale.
As the marker collectively bottomed in 2011 (according to Case Shiller), the market began to understand what the new normal was going to look like and the gap between new and resale began to return to its normal spread.
It is also interesting to see the units sold (new + resale built post 1990) during the same time frame:
- 2009 – 1083
- 2010 – 1046
- 2011 – 1065
- 2012 – 1282
- 2013 – 1314
- 2014 – 1473
This backs the trend that almost all markets are seeing (increased sales velocity) and helps explain the narrowing and subsequent expansion of the gap between new and resale ‘per foot’ from above. The number of sales occurring are trending upwards from the bottom of 2010 and 11. 16% more homes were sold in 2012 than in 2011. This is a good thing.
Applying the Numbers
So what do you do with this data? You can use it in your decision to price your home for sale or your decision to buy a new versus resale home.
- If you are a seller of an existing home, look at the price of the next best alternative new home and know that you are worth approximately 9-10% less in this market. If your home was built in the 2000’s, then maybe that difference is closer to 5-7% less.
- If you are considering purchasing a new home, look at the resale market for guidance. If a new home can be purchased for 5% over the resale market, in theory, you are buying a new home below market. If it is 15-20% greater, the the resale is probably the better decision
- If you are a builder and the lot costs dictate home pricing 20% above the resale market, then maybe you should look elsewhere.
At the end of the day, you can use data to guide your decision.
Understanding the value of a buyer’s NEXT BEST ALTERNATIVE can help you to know when to dig in and when to bend. Pricing is not an absolute and testing values with alternative methods is paramount to making correct decisions. Understanding that the use of comparable SALES in a rapidly shifting market does not tell the story.
Attack pricing and values from multiple angles to get the true picture.