New Construction Price Premium Nearly Vanishes

I was playing around with the sales data I’ve downloaded since April of last year when I noticed a noteworthy trend in the sales of new construction. If you split each month’s sales into new construction and re-sales, then look at the median prices of each group separately, an interesting pattern emerges.

What I’ve plotted below is each month’s new construction median sale price divided by the re-sale median, minus one. The resulting “new construction premium” expresses how much more homebuyers are paying each month for new construction than re-sales.

King Co. SFH New Construction Premium

For the 12-month period between April 2009 and March 2010, new construction was selling for about 20% more than re-sales, but beginning in April of this year, that difference shrank dramatically, falling to as little as 6% in July.

With a swing that large, I’m inclined to question whether my data is correct or not, but with four months in a row telling the same story, I think there may be something real going on here. Unfortunately my data only covers King County, so I am unable to easily see if this is a widespread trend, or just something brought on by one or two big developers slashing prices.

My working theory right now is that this shrinking new construction premium is the result of a couple of factors. I think part of it may be that some builders rapidly adjusting their strategies to succeed in the still-depressed housing market. The other scenario that I think is in play here is builders that bought bank-owned land on the cheap from banks and are taking advantage of low materials and labor costs to put out a noticably less expensive product.

Whatever the cause may be, it is definitely an interesting trend to keep an eye on if you’re interested in buying new construction.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

38 comments:

  1. 1

    I’m not sure if you can do this (I still cannot under Matix), but try it again with only 1.75+ bath homes and I think you’ll probably see that the premium disappeared a long time ago, and might even be negative due to smaller lots, etc.

    Three years ago you could filter new construction out when pricing a resale. That changed at least two years ago.

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  2. 2
    fschwiet says:

    “but beginning in April of this year”

    I’m sure its a coincidence, but isn’t April when people generally found out that the McGuire was to be torn down? (The relatively new apartment building in Belltown) Thats when I decided to prefer buildings that had been around for 10 years.

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  3. 3
    nwerner says:

    You should also do your analysis on a per SF basis if you haven’t already. The square footage of new construction has dropped considerably, in the range of 20 to 25 percent. Your second comment, re: lower lot prices and construction costs, is accurate but it doesn’t tell the whole story.

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  4. 4
    The Kid says:

    What is the average per sq/ft construction cost in King County these days? Anyone know? I seem to remember it used to be about $140 but I presume that has decreased.

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  5. 5
    nwerner says:

    $140 was darn nice construction, even at the peak. Production builders can do it for $70/SF, not including land costs. I have heard reports as low as $55/SF.

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  6. 6
    The Kid says:

    Wow… that’s a lot better than I expected. Maybe I actually can afford to build the home I want.

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  7. 7

    […] vanished in King County. Read about it here and please tell SeattleScape if you think it’s true, and […]

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  8. 8
    Dan abrahams says:

    I agree that the square foot analysis would be more valid. But I suspect that the narrowing of price has more to do with developers who are stretched too thin finally unloading inventory by pricing it lower. The new home developers are more exposed to the market and more likely to have to sell than the average “used home” owner.

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  9. 9
    Hugh Dominic says:

    By The Kid @ 6:

    Wow… that’s a lot better than I expected. Maybe I actually can afford to build the home I want.

    You can’t.

    Unless you want a cookie-cutter floorplan built on a tract full of identical homes. The builder prices are lower because of the efficiencies they get from buying and building en masse.

    If you want a spec home you start at $150/sq ft. If you want a good one then start at $200/sq ft.

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  10. 10
    mukoh says:

    RE: Hugh Dominic @ 9 – Hugh I think you are talking about custom in your last paragraph. Spec retail is about $100 a foot including GC fees for management =.

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  11. 11
    The Kid says:

    RE: Hugh Dominic @ 9
    Nothing custom and nothing fancy. Nothing big either. Readily available plans, simple design. It’s one of the Ross Chapin designs. This one:

    http://www.rosschapin.com/Plans/Cottage/Egdemoor/Edgemoor.html

    Even at $100 sq/ft I might be able to pull it off.

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  12. 12
    S-Crow says:

    I can see this gap of new vs. existing homes (resale) narrowing and is why new construction is always a pull for buyers. Builder to me on Tuesday: “x bank has been selling lots for around $30-40K when I’m into them at $120K……”

    Out in Snohomish Co. one builder with a project looking northeast over the valley has just revived a tumbleweed, overgrown grass phase that has been dormant for a couple years. It will be interesting to see what they start selling these homes for and I imagine the prior phase homeowners are also interested.

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  13. 13
  14. 14
    pfft says:

    that is pretty amazing. homebuilders are better though right? I though most of them aren’t losing as much money anymore and some are actually posting profits. is this right?

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  15. 15

    RE: Kary L. Krismer @ 1 – To follow up on my first comment, I just did a search in Kent for 1.75+ bath homes, built 2008 and before, or 2009 and after. The median on the older houses was about $45,000 higher, the mean about $50,000 higher. The older houses were about 340 square feet larger, so the cost per square foot was pretty close. Besides size, this increased value for older houses is primarily due to the fact that many of the older houses in Kent are much nicer houses, while many/most of the new house are little crappy boxes.

    BTW the sample size was 18 on the older and 20 on the newer.

    Numbers from NWMLS sources, but not compiled or guaranteed by the NWMLS.

    Edit: I also recently sold a place in Bothell where the new construction was selling for about $50,000 less than what I received with multiple offers. One person offered about $50,000 less than what I was asking because of those new construction properties, and I told him he wasn’t even in the ballpark.

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  16. 16
    James says:

    In our experience moving up here a few years ago, the newer the house, the smaller the lot, the larger the house.

    We found this time around (and our first time around in Southern California) that the homebuilders are getting it wrong. If you’re moving out of an apartment into a place of your own, you’d like a *little* more space, but you’d also like to get some space between you and your neighbor. The new houses give a massive amount of space, but they’re right on top of one another.

    Looking at our King County yearly assessment, relatively speaking, the land has much more value than the building(s). By building fancy houses on tiny lots they are just maximizing profits but actually creating properties that are unaffordable to first-time buyers and less desirable for people moving up.

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  17. 17
    deejayoh says:

    By mukoh @ 10:

    RE: Hugh Dominic @ 9 – Hugh I think you are talking about custom in your last paragraph. Spec retail is about $100 a foot including GC fees for management =.

    that has to be for a production builder. What I’ve heard from my builder buddies is that townhomes can be done at $100/sq in seattle. SFH, more like $150 -200

    Kid – for your 1,000 sqft cottage – plan on the higher end of the range. Big rooms are cheaper per square than small ones

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  18. 18
    Scotsman says:

    RE: The Kid @ 11

    I love his stuff but would expect it to be near the high end on a cost per square foot basis if built as designed. There is a lot of detail work and very high quality materials in the wood trim, etc. Clear VG fir/cedar isn’t cheap. The good news is material costs and labor are still falling- a contractor buddy says by perhaps as much as 25% depending on what you need.

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  19. 19
    The Kid says:

    RE: deejayoh @ 16

    Finally tracked down some more details. Yeah, you’re right. They are expensive. Really pretty counterintuitive. Smaller apparently = more expensive, and not just on a square footage basis. Despite the fact that it has no HVAC system to speak of (just wall units) and only four corners, with a small footprint.

    Kind of depressing really, just wanted a small, well designed home, a modern bungalow basically. Apparently that’s not permitted anymore. Of course the things were designed as “pocket community condo alternatives” rather than a detached dwelling on a decent amount of land like I want to do.

    On the other hand, apparently most of that ended up being land cost and not construction cost. Requires more research.

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  20. 20
    Scotsman says:

    If Ross Chapin designed larger homes would they look like this? When the government buys me my home (as stimulus) this is the one I want:

    http://www.johnlscott.com/propertydetail.aspx?IS=1&ListingID=300418968

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  21. 21
    The Kid says:

    RE: Scotsman @ 19
    Not enough built-in’s. I seem to remember that home being featured on the cover of some high end homes rag a year or so back. Kinda like the styling, but it seems… cold, even just looking at the pictures.

    And you don’t have to wait for government stimulus! Just buy it with bootstraps and Ayn Rand novels. :-P

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  22. 22
    David S says:

    RE: Scotsman @ 19
    This tells the story,,,HURRY! Don’t miss out on this once in a lifetime opportunity!
    ON REDFIN: 288 days
    CUMULATIVE: 744 days

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  23. 23
    Scotsman says:

    RE: The Kid @ 20

    Agreed it is a bit cold, and I’d prefer if the excess busyness was gone from the stair railings,etc. But with a little remodel and the right area rugs and comfy furniture. . . At least it gets a lot of light.

    No one seems to be jumping at the chance to buy. I’ll continue to watch.

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  24. 24
    One Eyed Man says:

    RE: Scotsman @ 22

    ” I’d prefer if the excess busyness was gone from the stair railings,etc.”

    Heck, I thought that was built-in wine storage for about a 1000 bottles. golly, now where am I going to put my wife’s wine? Without the wine, I’m pretty sure she’ll dump me like a hot rock. If that was wine storage all I’d need is about 50K in Persian rugs and another 50K to Stickley and I’m there.

    But Scotsman, I figured you’d need a place on the water to tie up your Tolly. This one’s on sale for over 50% off, marked down from about 12 or 13 mil. If its the house I’m thinking of, its owned (or was owned) by MSFT CFO. And it has a west facing sand beach which is hard to find on Lake Washington. It sold in about 2004 along with the view house on the road above it for 10 mil as a package deal. Getty Images used to rent the house above for their CEO. I guess he was ahead of his time on the rent v own thing. ;-)

    I prefer the wood ceiling and natural wood tones in the Preston house to the muted pickled wood tones in the lake house but the natural wood in the lake house still comes through when you see it. And I’m pretty sure that I can get by in half or less that many sq ft if I can find a place to put the golly wine.

    http://www.johnlscott.com/propertydetail.aspx?IS=1&ListingID=300738392

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  25. 25
    wreckingbull says:

    RE: Scotsman @ 22 – For some reason triangular windows always kill it for me. Maybe this is due to overexposure to our “NW Contemporary” movement from the late 70s. Maybe the resemblance to kit homes you see marketed on the side of I-5. Not sure. Still like the rest though.

    Have to say, this goes against your small home idea. Added bonus: you only have to pay the county $17K a year for the right to live in your home.

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  26. 26

    Hello Tim, there are probably many factors at play, such as many of the “new construction” homes falling into the distressed sales category over the past few years.

    Another potential factor may be more of the builders requiring the buyer to provide the construction financing, and perhaps the shift of the “financing risk premium” helps lower the cost to build. (some builders cannot get Spec financing, anyway)

    Here in Vancouver Washington I ran a quick look at the 1600′-1800′ new homes; 2006 annual vs. 12 months of 2009 + 2010; and have for SFRs: 36 units down to 33 units, $153 per sqft down to $133 per sqft.

    A discouraging trend we are also seeing is the intrusion of the large national builders buying up the bankrupt and bank-owned subdivisions…(I can hear Pete Seeger’s “Little Boxes” playing louder and louder!).

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  27. 27
    Genob says:

    Does anyone out there have a good handle on construction costs for concrete/steel hi-rise condo construction downtown? I’m curious at what price existing inventory would just be subject to another building going up on the block next door.

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  28. 28

    By John@ Vancouver Washington @ 26:

    Hello Tim, there are probably many factors at play, such as many of the “new construction” homes falling into the distressed sales category over the past few years.

    That reminds me. I forgot to mention my search of Kent excluded short sales and REOs.

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  29. 29

    By Genob @ 27:

    Does anyone out there have a good handle on construction costs for concrete/steel hi-rise condo construction downtown? I’m curious at what price existing inventory would just be subject to another building going up on the block next door.

    I’m not following what you’re trying to get at. The biggest impediment to new construction would be the existing inventory, not the price of construction.

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  30. 30

    Moved to new thread.

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  31. 31

    RE: The Kid @ 19 – Smaller will always tend to be more expensive on a square footage basis.

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  32. 32

    […] a responseYesterday in response to the story about the vanishing new construction price premium, reader “nwerner” commented:You should also do your analysis on a per SF basis if you haven’t already. The square footage […]

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  33. 33
    Scotsman says:

    RE: One Eyed Man @ 24

    That is nice, especially the lack of a bulkhead. And it’s getting cheaper every day. ;-)

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  34. 34
    The Kid says:

    RE: Kary L. Krismer @ 31

    I’m just exploring every available option for affordable housing. Still not liking what I’m seeing.

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  35. 35
    Julie Lyda says:

    When researching the Trustee Deeds for Snohomish County in 2009, I found that MOST ALL small builders deeded their land and unfinished houses back to the lenders “in lieu of foreclosure”. I counted over 50 individual small builders and made a list.

    I don’t know if this same applies to King County, but I would be confident to say that of the new construction sales prices are selling at distressed property prices. I haven’t researched, but I’d take the bet that the Banks are sitting on quite a bit of land right now.

    Here are some Snohomish County numbers:

    Homes built 2010 sold in last 6 month:
    Median: $285,000 Avg. $306,786
    Avg. Cost Sf: $158.30
    Avg. SF 1,965

    yr/units sold

    2010 = 913 Median $304,950 Avg. $335,272 (ending 6/30)
    2009 = 1,603 Median $333,993 Avg. 365,606
    2008 = 1,666 Median $387,975 Avg. $421,145
    2007 = 2,518 Median $439,925 Avg. $473,919
    2006 = 3126 Median $415,000 Avg. $440,935
    2005 = 3,166 Median $357,950 Avg. $379,599
    2004 = 2,780 Median $281,950 Avg. $311,445
    2003 = 2,738 Median $249,950 Avg. $275,244

    There are 179 Completed Homes currently available:
    Median Price $299,950
    Avg. Price $356,270
    Avg Cost SF: $156.56
    Avg. SF 2,365

    265 Under Construction:
    Median Price: $339,973
    Avg. Price: $376,702
    Avg. Cost SF: $169.05
    Avg. SF 2,218

    204 Presales Available
    Median Price: $339,950
    Avg. Price: $381,757
    Avg. Cost SF: $168.40
    Avg SF: 2,243

    Sorry, can’t pull avg. cost per SF and avg. SF on prior years until Matrix upgrades their reports, put I’d be happy to post that when it’s available.

    Statistics not complied nor published by NWMLS.

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  36. 36
    Chuck says:

    So where are we now in King County. November 2011

    Example: Structure only (no land) cost per square foot with a modest level of finish and no landscaping, except grading. Perhaps a 2300 sq ft single level design, with a 3 bay garage, and a decent sized back deck or patio. Better add septic instead of sewer. Are we anywhere below $100.00 per sq. ft. built on your own lot, say $200,000.00 for this place?

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  37. 37
    Chris says:

    RE: Chuck @ 36

    Hi Chuck,
    It sounds like you and I might both be thinking about trying to build here in Seattle. It is my feeling that sellers of existing homes are still in denial about pricing. Rather than overpay for someone else’s dream house I’d like to try to build.

    May I suggest that we stay in touch and swap ideas, resources, thoughts and contacts? You never know, we may be able to offer each other a little support or help.

    Thanks,

    Chris

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  38. 38
    Chris says:

    RE: Julie Lyda @ 35

    Hello Julia,

    Can you point me in the direction of where I can find numbers for King County? I would really appreciate it.

    Thanks,

    Chris

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