March 23, 2012

New vs. Existing Home Price Gap Rises From 40% to 49%

March 23, 2012

New vs. Existing Home Price Gap Rises From 40% to 49%


Last week I used the NAR chart above to highlight the topic of a widening spread between existing and new home prices. Comparing this week’s February figures to January’s figures continues to illustrate the trend.

As of January, median Existing Home price was $154,700 and median New Home price was $217,100—a full 40.34% higher.

As of February, median Existing Home price was $156,600 and median New Home price was $233,700—a full 49.23% higher.

Median isn’t the best gauge, and nor is national data. Only local data is relevant when it comes to pricing.

But still, the 40-50% spreads are huge. The consensus after talking to my builder and money manager contacts is a confirmation of what the chart notes say:

This growing spread is because high-end new construction sells at a premium because those consumers can afford it. And short sales and foreclosure sales put a drag on existing home prices.

And of course the higher inventory for existing home sales (4,590,000 annualized) vs. new home sales (313,000 annualized) contributes to the price disparity as well.

Also below are a two good comments readers shared last week, and if anyone has further insight on the topic, please comment below or send me a note.

TOCOF: I wonder if the price disparity can be accounted for to some degree by the possibility that many of these resales are properties that are emerging from the pool of foreclosed homes, many of which have fallen into disrepair. The disparity may be resulting from the discount buyers demand for the cost required to refurb these properties.

LOUIS HANSELL: It is incomplete to compare the prices of new and existing homes without translating them into dollars per square foot.

If I told you I could sell you a house for $100,000, would you jump at that, or recoil? Your response would largely depend on the amount of house. Another factor would be whether it was on Philadelphia’s Main Line, or in a deserted neighborhood. The amount of land would be another factor. It is likely that existing homes sales represent a variety of neighborhoods, good and bad; new construction is most likely in more desirable areas. Take out Detroit, Cleveland and a few other cities and compare existing to new. Or, only take existing desirable neighborhoods, La Jolla and Malibu for instance, and compare the existing homes sale median price to new home median price. Existing home sale median prices can be distorted by many transactions

Median prices were quoted by David Lereah, back in the bubble, so that he could spin gold from straw. The low end of new construction is likely turning to rental, which would be apartments and multi-family dwellings. In a range like 1-2-3-4-5-6-7-8-9, the median number is 5.
Eliminate the 1-2-3-4 (they go to rental apartments or multi-family, or move in with parents, etc.), and the median number is now 7. Nothing made the group more ‘valuable’, but the median rose.

Averages also are prone to distortions. You and I are 6′ tall, and alone in a room. You could say that the average height of the people in that room is 6′. Now, Shaquille O’Neill enters the room. The average height in that room went up to 6’4″, but neither of us got any taller.

That is why the Case-Shiller uses a certain strict methodology, but it doesn’t get much attention. It uses comparable sales of existing single-family homes with a history of arms-length resales. All of that is important. What C-S does not measure is: condo sales, new home sales, sales by original owners, nor does it measure inside/private/non-arms-length sales, like sales to relatives for $1.

February Existing Home Sales
February New Home Sales