Homebuyers

Newly Constructed Homes May Cost More—But Wind Up Saving Buyers More Money

These days, many cost-conscious homebuyers are scouring real estate listings for a deal. Some are finding them in an unexpected place: the new construction market.

Traditionally, newly built homes have been perceived as more expensive than existing homes that homeowners put up for sale. But that's been changing as builders have been putting smaller, more affordable homes on the market and offering incentives that can lower buyers' upfront costs—and monthly payments.

"Some people think new construction is out of reach," said Mosi Gatling, a Las Vegas-based loan officer and senior vice president of strategic growth and expansion at New American Funding. "But because of these incentives, it's a viable option for homebuyers."

After new home prices fell below existing home prices nationwide during June, prices flipped in July.

The median sales price for existing homes was $422,600 nationally in July, according to the National Association of Realtors (NAR). Meanwhile, the median sales price for new homes is above that at $429,800, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).

However, each housing market is different, and in many areas, new homes are priced below existing homes and offer their own advantages beyond simply being new.

Since mortgage rates spiked nearly two years ago, many builders have been figuring out ways to lower costs for buyers. This can include buying down mortgage payment rates to lower monthly housing payments for buyers.

"In areas where new construction is predominant, the homebuilders have been offering incentives that vary by way of paying closing costs [and offering] rate buydowns or rate protection," said Gatling.

Builders are buying down mortgage rates

Homebuilders are looking to motivate buyers by offering deals like mortgage payment rate buydowns that help increase affordability for many aspiring homeowners.

"In a lot of cases the buyers would not have qualified at all at current market rates," said Gatling.

She added that buyers are looking less at the overall price of the house, and more at having a comfortable monthly payment.

Earlier this year, large homebuilder D.R. Horton said it would continue to offer mortgage payment rate buydowns.

Sometimes, these buydowns lower payment rates for buyers for the first two or three years of a mortgage. Some builders are even buying down payment rates for the entire 30 years of a fixed-rate loan.

A mortgage rate buydown can make a big impact. If a buyer purchased a $420,000 home with a 10% down payment and a 7% mortgage rate, their estimated monthly payment could wind up being more than $2,500 a month. (This doesn't include taxes, insurance, or homeowners association fees.)

If a homebuilder offered a permanent buydown with a 5% mortgage payment rate, the buyer could save about $500 a month compared to having a 7% rate

Mortgage payment rate buydowns have been a popular incentive, with 84% of builders saying they were willing and able to buy down mortgage payment rates to the 5% range, according to a survey by real estate data provider Zonda.

Builders are also cutting prices and offering other perks

Price cuts are another way builders are trying to attract buyers.

A third of builders, 33%, reported they cut their prices to boost sales in August, according to a survey by the National Association of Home Builders.

Paying all or part of a buyer's closing costs or offering design upgrades are other incentives being offered by some builders.

Builders are constructing more affordable homes

They are also constructing less expensive smaller and attached homes to ease affordability.

New single-family homes shrunk down from 2,300 square feet to 2,180 square feet between 2021 and 2023, according to the Joint Center for Housing Studies of Harvard University.

Townhomes have also become popular options. In 2023, the number of new townhomes rose 5% year-over-year, the highest level since 2006, according to the center.

The limited number of existing homes for sale is also making new construction more appealing as buyers struggle to find existing ones in their price ranges on the market.

There was a seven-and-a-half-month supply of new single-family homes available in July, according to NAHB. That was compared to a supply of just four months for existing homes in the same month, according to NAR.

In addition, there is often more new construction where there is more land available to build on. Buyers looking for new homes may want to out into the suburbs and beyond.

"It's expanding the geographical boundaries of what a city is," said Gatling of the new construction. "People are buying far away from what was considered the nucleus of the city simply because of affordability."