Why a New Build Is a Better Deal Now Than An Existing Home

 Rapidly rising rents recently nudged Dan Raymond and Casey Juntila to wonder if they should try to buy a house instead.

“We looked around and realized [rent was] the same as a mortgage, even with the inflated rates and higher home prices,” Raymond recalls.

The couple, who are engaged, work as researchers at the University of Michigan in Ann Arbor and wanted to live in the suburbs. Yet while they could swing a monthly mortgage payment, they hadn’t amassed much savings to put toward a down payment or closing costs. As a result, their house hunt dragged on for three months with no affordable prospects in sight.

That’s when their real estate agent, Charo Ledon of The Home Buyer’s Agent of Ann Arbor, suggested they consider an option that they presumed was beyond their financial reach: a brand-new house.

Intrigued, Raymond and Juntila, both 28, started shopping for new construction—and were surprised to find one they loved that fit their budget for $265,000.

“We weren’t looking for anything grandiose,” Raymond says of the three-bedroom, two-bath ranch house that caught their eye. Unlike many of the pre-existing properties they’d toured, this house boasted many high-tech amenities such as heated floors (which come in handy in Michigan).

The house was also completely built and move-in ready, which meant that certain aspects weren’t personalized for their purposes. For instance, the garage was not quite spacious enough to easily fit their large car—but that was OK since Raymond hoped to use the space as a workshop instead.

Another quirk was that they’d have to buy their own appliances, but the builders sweetened the deal with an appliance credit. And although they wouldn’t budge on the property’s price, they more than made up for it with a lower-than-average interest rate through the builder’s lender of 5.5% and no closing costs.

From a financial perspective alone, buying this new house was about the same price, if not cheaper, than purchasing a pre-existing property.

“This was a huge win for us,” says Raymond, who closed on their house in January. “We weren’t looking for new construction; we were just looking for things where the price was right for me and the quality was right for my fiancée. New construction met both needs.”

The new-construction glut: An untapped bargain for homebuyers

While many cash-strapped homebuyers might presume a brand-new home is even further outside their budget than a pre-existing house, today that’s not always true. After several years of feverish building to keep up with the COVID-19 pandemic demand, some builders actually have too much supply on their hands, which spells a prime opportunity for buyers looking for a deal.

Across the country, “there are pockets of the market that have a little more supply right now” that builders are itching to fill, says Ali Wolf, chief economist at Zonda, a housing research firm.

The break couldn’t come at a better time for buyers, who face slim pickings on the existing-home market, with its stubbornly high prices combined with steep mortgage rates.

This new-construction glut is not a new phenomenon. Many might remember how years of overbuilding in the early 2000s led to a surplus of vacant new homes after the subprime bubble popped. But experts say today’s supply-demand imbalance is different.

Many builders spent the past few years building homes on spec, based on the assumption that someone would want to buy them. For a while, they were right: Homes were being snatched up at the same speed as previously owned properties, complete with bidding wars and lines around the block.

Then along came rising mortgage rates, which hit a 20-year high in October. Many buyers, priced out of the market, gave up, leaving builders scrambling.

Desperate builders, desperate buyers

Denise Ovalle, a broker with Buyer One in Chandler, AZ, has seen the tide turn in her local market.

“The builders went from holding lotteries, having people waiting in line, and not paying brokers to now offering incentives to brokers and buyers,” she says, adding that this shift in power is cyclical. “I’ve been in the business a long time, and it always happens.”

The Phoenix metro area, where Ovalle works, is one of the regions with the biggest supply of new construction for sale right now, according to data by Zonda. Las Vegas, Sacramento, and Jacksonville are others.

But that doesn’t mean there aren’t pockets of opportunity elsewhere, as Raymond and Juntila discovered.

In Atlanta, broker Stephen Freudenberg, of Freud & Berg Real Estate Advisors, is inundated daily with email offers from builders. “5% commission for you and $30,000 for your buyer!” reads one such flyer.

In some cases, the bigger discounts in the Atlanta area can be found in suburbs farther from business districts and downtown areas, Freudenberg notes. In part, that might be because fewer people work from home now than they did before the start of the pandemic. But some of these discounts might simply be correcting for the overly high home prices of the past few years.

“A lot of people may have realized they massively overpaid for a house in 2021,” he says. In fact, for some buyers who put a deposit down on a new home when prices were at their peak, he adds, “there’s an argument to be made that you might just want to walk away.”

Zonda’s Wolfe agrees that home prices over the past few years rose so high that “even far-out houses [were] no longer a deal,” she says. Factoring in today’s higher mortgage rates, it’s no surprise that many of these new-construction homes are now vacant, because they’re simply out of reach for many buyers.

Yet what many buyers might not realize is that today’s higher mortgage rates are exactly the kind of problem builders can help them solve. While builders are somewhat more reluctant to lower prices, since that can set the price for the surrounding community, many companies are more than happy to extend favorable mortgage interest rates and builder incentives like closing cost assistance or upgrades to appliances or amenities.

As such, buyers shopping for new construction shouldn’t get too hung up on the home’s price, knowing that many other ways to cut costs are waiting if they come to the negotiation table of builders with vacant homes sitting on their books.

This opportunity might be “for a fairly short window,” Wolfe warns. “Buyers so far this year have proven to be very reactive to price cuts and incentives. We’re working through that in real time.”

In other words, smart buyers will want to seize the opportunity right now just as Raymond and Juntila did.

“Don’t be a pessimist,” Raymond advises other would-be buyers. “You’re never going to find out what you could get unless you try.”