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July 28, 2014

Buyers to Pay a Premium for New Homes?

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Buyers to Pay a Premium for New Homes?

Many of the nation’s largest builders are raising their prices, even as existing-home prices are beginning to moderate. 

For example, homebuilder KB Home has had average prices for its new homes soar 23 percent annually. Lennar has raised the average price on its new homes by 16 percent annually in the third quarter, now averaging $291,000. The average price of all existing homes was $258,000, according to the National Association of REALTORS®. 

"The big picture is that new-build house prices fell less than existing house prices during the crash and have risen more during the recovery," says Paul Diggle at Capital Economics. 

While prices are up for new homes, both Lennar and KB Home announced this week a weaker pace for new orders. Lennar officials blamed the slowdown on rising mortgage rates and the double-digit percentage increases in home prices this year. 

“We see strong, viable, fundamental demand out there, but it has cooled a little bit,” Rick Beckwitt, Lennar’s president, said during a recent earnings call. “As a result, from a pricing standpoint, we have selected some of our inventory and increased incentives associated with that inventory.”

Analyst Ivy Zelman doesn’t believe new home prices are inflated or priced at an abnormal premium over existing homes. 

"In Arizona, California, Florida, and Nevada, we conclude that prices are still 15 percent lower than the 2006 peak, which excludes an adjustment for an increasing size of new homes and would be further compounded by seven years of inflation,” Zelman says. 

Source: “Forget easing prices, new homes are up, up, up,” CNBC (Sept. 24, 2013) and “New-Home Orders Slower for Lennar, KB Home,” The Wall Street Journal (Sept. 24, 2013)

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