NEW YORK (MainStreet) — Sales of existing homes may have dipped a bit over the last year, new homes sales have fallen off the cliff, dropping 22% between March 2010 and March 2011, according to latest figures from the Census Bureau. That might suggest a new home could be had at a fire sale price, unless there’s a good reason buyers are spurning new homes in favor of used homes.
One reason for the trend may be simply that the average new home in fact costs nearly a third more than the average older home. If they are both competing in the same market, though, how can such a huge difference make sense? It’s complicated, but a builder putting up a new home has to cover the costs of land, materials and labor at today’s prices. That’s not a factor with existing homes, which typically were built for much less to begin with.
While builders resist selling new homes at a loss, many homeowners will sell for less than they might have received a few years ago because, if they’ve owned for long enough, they’ll still end up taking in more than they originally paid. Other existing homes are selling at a loss through distressed sales like foreclosures, which doesn’t happen as often with new homes.
Many new homes are built further out from cities, requiring longer commutes at today’s high gas prices, which gives many buyers second thoughts. And, as we’ve reported, fashions seem to be changing with buyers favoring smaller homes that are cheaper to buy and maintain, features more likely to be found in existing homes.
Still, there are benefits to buying a new home, even if it costs a bit more. With a new home, all materials and construction will meet today’s building codes, so the owner will generally not need to spend anything to get the house up to code in order to do a project like an addition.
With a new home, you’re also less likely to need a new roof, furnace or appliances during the next few years. Insulation is likely to be better on a new home, and the doors and windows will likely be tighter, helping to save on energy costs. You’re not likely to spend thousands on removing old trees, repaving the driveway or having the sewer line replaced, either, all things you might have to worry about when buying an older house.
So with arguments on both sides, consider these questions when deciding whether to buy an old versus new home:
What’s the all-in cost? Try to go beyond the purchase price to look at all the costs of buying and living in each home. In addition to obvious expenses like property taxes and utilities, consider commuting expenses, landscaping costs and repair or replacement of appliances. Your inspector should be able to provide a list of jobs you’ll likely face over the next few years.
How long will you stay? In today’s market, it probably doesn’t make sense to buy any home, new or used, unless you plan to stay for at least five or six years, so appreciation can offset various costs of buying and selling.
After a short stay in a new home, you’d probably be able to put the property on the market with just a little painting and yard work, while you might have big expenses, like a new roof or driveway, to get an older home ready to sell. If you’ll stay a long time, these costs don’t matter as much, especially if you pay less for the used home.
What’s the neighborhood’s future? If you’re thinking of buying a new home in a development that’s still under construction, do some sleuthing to make sure the builder has the wherewithal to complete the development. Partially finished homes with no sign of continuing work are a red flag, no matter what the builder says. The municipal or county office that provides building permits and inspections may have a good idea whether the project is in trouble.
Even if the development is completed, be wary if many homes are still for sale in the area, as prolonged vacancies can depress home values. Check with the homeowner’s association, if there is one.
Of course, established neighborhoods can run into trouble, too. Vacant homes, too many for sale signs and a lot of distressed sales are worth worrying about. Nearby homes with uncut lawns, flaking paint and other maintenance needs may be flashing signs of troubles to come as well.
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