New-home buyers are driven ultimately by their desire for something better. Nine out of 10 purchasers of newly constructed homes reported their new home is the same or better than their previous home. The immediate causes for a move include a better location to work, school, recreation, and people; a larger or smaller home to accommodate changes in the household composition; different costs to align with increasing or decreasing incomes and assets; and better alignment with their current lifestyle, i.e., retirement or newly established independence.
While financial considerations certainly play a part in determining if there is to be a move at all and if so, the most likely kind of transition, the choice in the change is dictated by better alignment with basic housing characteristics such as location, size, and amenities. The U.S. housing market continues to recover from the worst collapse since the Great Depression. Low equity and future income uncertainties were the driving reason why so few purchases occurred over the trough, but the worst is over. Equity positions, income, and mortgage qualification standards remain inhibitors to a fully recovered housing market, but they slowly are giving way to the underlying reasons for a new-home purchase.
According to the Census Bureau and HUD's American Housing Survey, the leading reason to purchase a new home in 2012 and 2013 was room layout and design. That was consistently the top reason during the cycle. However, there was some shifting over the cycle once below the top reason. At the worst of the cycle in 2010, the second-leading listed reason from those who did buy a new home was that it was the only one left. Inventory levels in 2010 through 2012 were at their lowest levels in the 50-year history of the data.
The new-home neighborhood has become a more important reason for purchases most recently. It was the third reason behind financial issues in 2012 and 2013, but was eighth and seventh in 2011 and 2005, respectively. And similarly, when asked the primary reason for choosing the neighborhood, new-home purchasers reported the house itself was the most frequent reason in the most recent survey. Earlier in the cycle, the look and design of the new-home neighborhood was the top reason for choosing where to buy. Proximity to jobs, family, and friends also scored high over the whole cycle.
Financial reasons were third on the list in 2013 as the market began to recover, down from second on the list at the peak of the market in 2005. Oddly, financial reasons were not high on the list at the worst of the market in 2010 and 2011. Those who were able to purchase were more interested in the right home than any financial issues. Finances such as the cost of the home and the ability to obtain a mortgage are now very close to the top reason of house design and room layout.
The reasons for buying of course do not provide reasons for not buying. All home sales remain below their historic levels, and new-home sales are about half where they would be in a normal market. New-home sales typically are about 16 percent of all home sales, but they're averaging only half that share in the past several years. Distressed existing-home sales have helped maintain a level of used home sales, but new-home sales took the brunt of the fall in demand.
Now existing homeowners are the dominant buyer in the new-home market as first-time buyers remain on the sideline. A recent survey of builders reported half the normal sales of new homes to first-time buyers. As a result, new home sizes and prices have increased because the purchasers have equity from their previous sale and are looking for larger, more amenity-filled homes. The first-time buyers' return to the market in volume is probably a year off.
This year's demand likely will retain the characteristics of the past couple of years as move-up buyers search for the homes that suit their desire for more space, better design than what they left, and a neighborhood close to their job, family, and friends.