Tags: New | Home | Sales | Rebound

New Home Sales Won’t Rebound Soon

By    |   Wednesday, 30 Nov 2011 07:56 AM

New homes are expensive compared to existing homes, and that makes buying one risky for many potential home buyers. Like a new car, the new home could depreciate sharply as soon as the sales papers are signed.

This year should be the worst yet for new home builders. They have reacted to low sales by cutting back on inventory.

The latest report from the Commerce Department shows that there is about 6.3 months worth of unsold inventory on the market. This is down from more than 12 months of supply recorded at the end of the recession in 2009.

Decreased supply would normally contribute to an increase in sales, but for now the cost of a new home might be too high relative to existing homes.

Buyers are usually willing to pay a premium for a new home. This is justified because the cost of maintaining a new home is lower than an older home.

Recent reports show that premium is almost $47,000. This means new home buyers are paying about 28 percent more for the new home than a comparable existing home. Historically, the premium has been about 15 percent.

Builders have little room for price cuts since profit margins on new homes are typically around 10 percent. Foreclosures of existing homes will provide ample supply to hold down prices on all homes.

Most likely, new home sales will stay at depressed levels for some time. Foreclosures will hold prices down, but further price declines are unlikely in most markets since banks should sell this inventory gradually, and at a pace that doesn’t cause a large drop in local markets.

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MichaelCarr
New homes are expensive compared to existing homes, and that makes buying one risky for many potential home buyers. Like a new car, the new home could depreciate sharply as soon as the sales papers are signed. This year should be the worst yet for new home builders. They...
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2011-56-30
Wednesday, 30 Nov 2011 07:56 AM
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