There are a number of factors that make the post-Great Recession housing market unique among recent business cycles. A persistent skilled labor shortage, growth in land development and regulatory construction costs, a years-long period of under-building, and a sustained decline for housing affordability define the economics of the housing market over the past decade and have led to an affordability crisis. These supply-side headwinds have left clear evidence on the relative prices of new and existing homes.
For decades, there had been a fairly stable gap between median new and median existing single-family home prices, as measured by the Census Bureau and the National Association of Realtors. From 1990 to 2008, this gap was approximately $20,000, meaning that as prices for both types of homes increased, the typical new construction single-family home was $20,000 more expensive than the typical resale of an existing single-family home.
After the Great Recession, this stable gap ended. From 2008 to 2013, a period defined by the Great Recession and the stimulus era of the home buyer tax credit and declines for single-family construction, this gap expanded from $20,000 to $92,000. Why? This occurred because builders shifted away from the entry-level market and concentrated on larger, more expensive homes. This was the right business strategy because this market had both sufficient housing demand and available financing for builders to develop these kinds of homes.
From 2013 to 2017, this gap in home prices was volatile but ranged from $45,000 to $90,000 as the market faced a perfect storm of headwinds (essentially the 5 Ls of supply-side challenges: lending, lots, labor, laws/regulatory concerns, and lumber).
However, two developments changed the market in 2018. First, for the past few years, new-home size has fallen as builders have slowly increased construction of entry-level homes. This composition change in the inventory mix held down the median price of new homes. And during the second half of 2018, higher mortgage interest rates caused a slowdown in price growth for new and existing homes. But more fundamentally, the decline in affordability led builders to increase use of price incentives. NAHB estimates that such incentives increased in use from 10% to 40% for new-home sales.
The result was a downward trend for median new single-family home prices, which peaked at $343,400 in November 2017 and fell to $328,400 in August 2019. While the gap in the August data increased to $47,700, the difference between new and resale prices has likely passed its peak for the cycle. As market demand rebounds due to lower mortgage interest rates, the gap is unlikely to close back to $20,000. But it will find a new range of $20,000 to $40,000 as construction at the entry-level expands.
While a smaller gap is a challenge as construction costs continue to rise, from a macro perspective limiting the size of this gap is key to increasing overall home construction volume. Policy would help, of course. As NAHB research has shown, for a typical newly built single-family home, about one-quarter of the final sales price is due to regulatory costs and burdens. Lowering such costs will help reduce construction expenses and improve housing affordability.
