Have Big Homes Topped Out?

The real estate market has slowed during the past year, a remarkable achievement given interest rates below 4 percent, prices nationwide which have yet to return the 2007 peak, and as much pent-up demand as anyone can imagine.

Not only does the real estate market remain fragile, the new-home market in particular has not come close to regaining its past allure. The advantages of new homes — modern technologies, new warranties, new appliances, and the ability to select models, colors and features — have simply been overwhelmed by costs.

In 2005 there were 1.283 million single-family new home sold but only 437,000 sales in 2014 while existing home sales went from 7.040 million in 2005 to 4.940 million in 2014.

In the case of both new and existing home sales there has been a huge contraction. Existing home sales are down 30 percent while new home activity dropped 63 percent.

The sale levels seen in 2005 are unlikely to be repeated for a very long time in large measure because many transactions back then were lubricated with toxic financing, loans which in fairly short order lead to a massive number of foreclosures and short sales. That said, new home sales have fallen a lot further than existing home transactions. Why? In large measure because of problems relating to price and size.

New Home Pricing

Back in 2005 the typical new home on average sold for $297,000, a figure that rose to $343,800 in 2014, an increase of $46,000.

The average price for an existing home amounted to $219,600 in 2005 versus $208,300 in 2014, a decline of $11,300.

Seen from the perspective of today’s buyer, the typical new home costs $135,500 more than an existing one. That’s a HUGE sales barrier and here’s why:

Buy a home for $343,800 with a 3.5 percent FHA loan and the down payment is $13,433. Buy an existing home for $208,300 with 3.5 percent down and the down payment is just $7,290 — a difference of better than $6,000 and a big deal in a nation which saves just 4.7 percent.

Now imagine that both properties can be financed at 3.8 percent fixed over 30 years. The new home buyer has a $370,367 mortgage and a required monthly payment for principal and interest of $1,725.75.

The existing home buyer has a $201,010 mortgage. With the same terms the monthly payment is $936.62.

The difference between the two loans is not only $789 per month, it also can be seen in the need for vastly more income to qualify for the larger loan required to purchase the new home, income a lot of people just don’t have.

To paraphrase the mantra of the day, “new homes just cost too damn much.”

Square Feet

But why are new homes so expensive?

No doubt some of the answer lies in rising costs for materials, labor and land. But another reason concerns size: When it comes to new homes size really does matter: The typical new home in 2005 averaged 2,434 sq. ft. By 2014 the same average house had grown to 2,607 sq. ft. In comparison the typical new home in 1975 had just 1,645 sq. ft.

You have to wonder: Are bigger houses the right way to increase new home sales? If the cost of a home is measured in part by square footage then it follows that more square feet equal more cost. Given the gap between new and existing home prices how is this a winning formula? Did people in 1975 with those modest 1,645 sq. ft. homes live in some sort of residential poverty or were those homes perfectly adequate for most owners?

The high prices for new homes has begun to spawn a small but visible interest in tiny houses, homes and apartments with just a few hundred square feet. Such properties are not a viable replacement for most residences, but every time one of them sells it’s one less opportunity to market a new or existing property.

Tiny houses are getting a lot of attention, properties which raise the question of whether today’s elephantine homes are either affordable or practical. Judging from the substantial decline in new home sales a lot of people plainly think that smaller and cheaper are better, and they’re saying so with the housing choices they make.

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Related News
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For the latest real estate news and trends get a FREE issue of our award-winning real estate newsletter, the Housing News Report.

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