Thursday, September 1, 2011

The Widening Gap between New and Existing Home Prices : Economists' Outlook

The Widening Gap between New and Existing Home Prices

The price of newly constructed homes refuses to budge downwards.  After hitting the cyclical low of $204,000 in October of 2010, the typical transaction price of new homes has been around $220,000.  In July, the median sold price of a new home was $222,000.  Though construction workers’ wages have not changed in the past four years (stuck at $38 per hour on average), the costs of construction materials have been rising.  As a result, homebuilders simply cannot lower the price without suffering a financial loss.  That is, it is better not to build than to build and then have to slash the price.

Meanwhile, existing home prices have to respond to supply and demand pressures, and supply has so far had a better hand.  As a result, lowering the price was the only option for many homeowners, other than pulling the home out of the market completely.

Due to the stubbornly high new home prices and lower existing home prices, the gap between the two has opened up.  From consumers’ point of view, therefore, existing homes offer an increasingly better value.  Because of this, we should expect new home sales to lag behind in the recovery as compared to existing home sales.



This is crazy if only the supplier could see that by keeping supply for new construction so high they are effecting the ability of the builders to build

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