I think it's really that simple to explain why new homes have their lowest share of the for-sale housing market in at least the last 35 years. As you can see in the accompanying chart, new homes have historically accounted for about 1 out of 6 homes sold, which represents about a 15% share of market. Currently the share of market for new homes is less than half that.
To prove my point that housing price disparity between new and existing homes is behind the decline, I did some research. In 1983, the median price of a new home was 7% higher than the median price of a existing home. In 1993, the difference was 16%, and in 2003 new homes were 8% more expensive than existing homes. So what's the difference now? It's pushing 40%, with the median price of a new home at more than $270,000 and the median price of an existing home around $200,000.
Of course you can argue that the most active buyers today are second and third time move up buyers and that new homes are bigger and better than existing homes, and, therefore, new homes have to--and should--cost more. And you can't forget that builders make more money and at a higher margin when they sell a bigger, more expensive homes.
But, having said that, I still think it's time, past time, in fact, for the industry to step back and acknowledge that it is under-serving not only the first-time buyer market but the lower end of the move-up market as well. And if builders want to build and sell more houses, they need to think small and think less expensive.