The Benefits of Buying a New Home

NEW YORK (MainStreet) -- People who would never, ever buy a used car will happily pay hundreds of thousands of dollars for a used home. In fact, we don’t even call them used – they are "existing homes," which sounds less likely to be worn out.

Nonetheless, there are pros and cons to new versus used, and the issue has become more important recently because of the soaring premium paid for new homes.

As a recent blog post in SmartMoney put it: “The median price of new homes sold last month was $233,700 compared to $157,100 for existing homes. That $76,600 difference is up 27% from last year and up 57% from 2010, according to the National Association of Realtors. In fact, since 2006, the price gap has more than tripled.”

The gap is widening because foreclosed homes and other distressed properties are changing hands at fire-sale prices, typically at a loss for the seller. That drags down prices of existing homes nearby. Meanwhile, builders can cut prices on new homes only so far given the cost of land, labor and materials. Builders won’t build if the sales price won’t provide a profit.

For most buyers, new versus used is not a critical issue. People pick a home they can afford that appeals to them, and there’s not much difference between a brand new home and one that’s 10 years old. Some buyers prefer the styles of homes built in the past, but the fact that those homes are older is usually not itself an important selling point.

But when the price gap between new and used gets as wide as it is now, shoppers really should think twice about whether it’s worth paying a premium for a new home. So, what are the pros and cons of each type?

The key is to try to go past sales price and try to figure a total cost of ownership over the time you’re likely to have the home, just as you might consider financing, fuel, maintenance and insurance costs in comparing the cost of one car versus another.

Newness certainly has some financial merits. A new home probably won’t need a new furnace or roof for a few years. The kitchen will be up to date, the paint fresh and so on.

A new home might be more energy efficient than a very old home, with better heating and cooling, more insulation and tighter windows. But this benefit may not be as pronounced if the existing home is only a few years old.

Landscaping could go either way. Some new homes come pretty bare, requiring lots of expensive planting. An old home might offer the pleasure of an established garden and fully grown trees. On the other hand, it can cost thousands to take down trees that have become too large or decrepit. So the landscaping issue has to be evaluated case by case.

Taxes may be different as well. Many communities go decades between property appraisals, so that older homes are valued at less than comparable new ones, which are appraised when they are finished.

The condition of the surrounding properties is also a factor. In a new development, all the homes are likely to look pretty good, helping to maintain values, while conditions can be spotty in an older neighborhood. Be careful, though, about buying in a development that is not yet complete, as builders sometimes go bust and leave big messes and half-finished structures that undermine values.

Finally, consider the “opportunity cost” for the savings that could be invested if you bought a cheaper existing home. That money could grow faster in the stock market or other investment than it would if put into a new home, and it would be easy to get at for other purposes. Of course, if existing homes are cheaper, you could buy more home by choosing used over new.

In the end, the choice may come down to personal preference. But before committing, be sure to compare both types of homes in the same market. Before buying the older home, ask the appraiser what expenses are likely to come up in the next few years. And ask the sellers of both types of home to show you bills for the past year’s heating and cooling costs.

Show Comments

Back to Top