Opinion: will we see massive price drops in new construction?

Lifestyle is incredibly important to homebuyers today.

Over the last two years, Boise, Idaho, really hit the map as people from the West Coast moved here to enjoy the lifestyle and lower cost of living. Builders responded in kind, gearing up the development of new homes to meet the growing demand.

There was one problem, we were already at a new home deficit, making the new home market incredibly competitive. Practically every listing that came on the market received 15 to 20 offers, and bidding wars drove prices higher and higher. Builders added higher-quality finishes and amenities to justify the prices, and people happily paid them.

But when inflation and mortgage rates started to rise, the rush slowed. New homes began to linger on the market. To clear their inventory, so they could build the next round of homes, developers dropped their prices drastically — in some cases, $50,000 to $100,000.

The idea was to sell quickly, but it had the opposite effect. Potential buyers sat on the sidelines, waiting for the next drastic price reduction. In addition, potential buyers may have retreated to the sideline in response to the high level of uncertainty in the world today.

What is certain is that market shifts are impacting buyer mentality. Here are a few trends and predictions I see happening with new construction buyers:

Don’t expect massive price drops

Here’s the reality: We will not see the massive price drop that occurred between 2008 and 2011. We still have far too little inventory for far too many people. Also, a big component of the erosion of home values during 2008-2011 was due to foreclosures.

Banks wanted to sell off their abandoned homes because they were not in the business of being landlords and priced homes accordingly. Now homeowners have a lot more equity in their homes, so we aren’t going to see many underwater owners who have to mail their keys to the bank.

Lifestyle is increasingly important to buyers

Another major shift in today’s market is that more people are buying a home for the lifestyle it affords them. Fifteen years ago, we had conversations with buyers and sellers about how much money they would make from their home appreciating. Then, the house was looked at as an investment vehicle. Today, people view a house as a home where they can live the life they aspire to live.

That is a main reason why buying a new home right now aligns with the primary motivation of today’s buyers. The new homes on the market today are top-of-the-line. I don’t think there will be an opportunity to get a home of such high quality for much longer. In addition to the most expensive materials, today’s homes have sophisticated technology amenities and energy efficiency add-ons that were included to justify the sharp rise in prices. And unfortunately, now that the market has shifted, builders will be selling at or below cost to clear their inventory.

Consider value not price

When builders start building again, they face a few headwinds. First, inflation is driving up the cost of materials and labor, which means to remain profitable, builders will start using less expensive materials and offering fewer custom options because they won’t be able to pay lower wages.

If buyers wait until later this year to purchase a new home, they may get one of lesser quality than those on the market now. Buyers face the question of price versus value. Do they want to buy a high value home at a price that may seem too high to them, or do they want to buy a lower-priced, lower-quality home?

Focus on monthly payment, not sales price

If clients are waiting because of the impact of higher interest rates, there are ways to encourage them to step on the playing field. For example, we have been talking to buyers about buying down the interest rates to lower their monthly payment. In my experience, consumers typically focus on the monthly payment — whether it be a car payment, a cell phone bill or a mortgage payment.

We have been counseling people to use the $20,000 they are hoping for in price reduction to buy down the interest rate. This can save upwards of $300 a month. If they opted to buy the home with a $20,000 price reduction, that would only save $70 a month. The long-term savings of buying a home at full price and buying down the rate is much greater.

New homes are critical to the economy

While this may not be a deciding factor for people considering the purchase of a new home today, new home construction has a tremendous impact on our overall economy. In terms of inventory, new homes make up a small portion of available homes — approximately 10%. But the effect on jobs, housing related services and the GDP is much greater.

From the many people employed and housing materials purchased to build a home to all the things consumers buy to furnish their home, new homes keep the economy humming. While this may not be your key selling point with buyers, it certainly reinforces the importance of new homes to our industry.

The environment in which we are working today is changing rapidly. Understanding the dynamics at play in today’s new home market is critical to counseling your clients effectively as you keep their best interests in mind.

Jeff Martel is the broker-owner of Better Homes and Gardens Real Estate 43 North.