New Builds vs Newly Renovated - What’s the diff?
Builders are having a rough go of it. Construction costs are up, homes aren’t selling as fast as they predicted, and they feel bad about it - actually really bad - and they have for quite a while. Here’s a bit of a sampling of headlines:
With all that awfulness out there, what does that mean for people buying homes and adding value (aka ‘flippers’)? The answer is: not much.
The first difference between new-construction and value-add real estate investors is that the new construction product is a more expensive product and homes that are more expensive have fewer buyers. The average home in Denver sold price for $462,500 in October, while the average new build is listed at $596,928[4]. While the headline above of new build prices possibly ‘tumbling’ 20%, it looks like even more than that could be needed to get to a price relative to other substantially similar homes available. The suburbs offer little respite, with new builds in Aurora at $573,977, Littleton at $699,403, Parker at $720,626 and even Broomfield at $499,722. There is also a greater demand for lower to mid-priced homes by first-time home buyers, which represent the largest body of buyers. In fact, there are probably more first-time home buyers than at any time in history.
While much of that considerable premium is due to builder choice, construction costs have not been helping either. New builds require more materials, as a percentage of the cost, than a home that has been refreshed. Everything is new in a new build and while that definitely has some benefits for buyers, it also comes at a cost. For example, lumber prices have been quite volatile, but are still higher than a few years ago, and are estimated to have added $14,000 to the average new home build[5]. And while a renovation will use some lumber and other materials just as a new build would, it is obviously much less.
Longer development times also come with the territory of new builds. Product that is becoming available for sale now has been in the pipeline for a year or more. Factors such as land acquisition, infrastructure like roads and curbs, permitting, etc. all influence the deliverability of a new construction home. And after all that, there is still the time required to build the actual homes. It was a very different market and outlook when the final product, now sitting finished but unsold, was started. Value-add developers have much less, if any, of those mitigating factors to deal with. They can be much nimbler, which can be used to considerable advantage in both rising and falling markets.
New builds, by their nature, are further from city centers, meaning that commutes from where people need to be outside the home require more time sitting in a car. On the other hand, redeveloped homes are right in the middle of the action, in fact frequently even more so as the towns and cities have grown up around them. And since there are so many more existing homes than new builds, a buyer can choose their exact location and will know exactly what the neighborhood will be like, because it is already there.
Apples and oranges are still both fruit though, and new builds and renovated homes likewise share some important conditions. Seasonality, elevated interest rates, the perception of deeply falling prices (incorrect, but nonetheless makes it tough), looming economic headwinds, depressed consumer confidence, etc. all influence buyers desires or ability to purchase any home.
The current market for homes has some challenges to be sure, but not all available homes are alike. New builds are materially different than the buy and renovate market and are having a tough go for a variety of reasons unique to them: higher price points, further out, and a more difficult development process. These don’t need to be concerns for renovators.
[1]https://nypost.com/2022/10/18/us-housing-market-in-free-fall-as-builder-confidence-suffers-disastrous-drop-economist/
[2]https://www.forbes.com/sites/jonathanponciano/2022/10/18/housing-market-recession-home-builders-warn-collapse-is-unsustainable-and-prices-could-tumble-another-20/?sh=36d284f1484f
[3]https://www.reuters.com/markets/us/us-home-builder-sentiment-falls-10th-straight-month-nahb-2022-10-18/
[4] https://www.realtor.com/realestateandhomes-search/Denver_CO/overview; https://www.newhomesource.com/communities/co/denver-area [all data retrieved 11/10/22]
[5]https://eyeonhousing.org/2022/07/since-pandemic-onset-lumber-products-have-added-14k-to-house-price-51-to-rent/