There's no doubt that the housing market has been a so-called "sellers market" for several years now. Although housing conditions were and still are significantly distorted by the effects of the COVID-19 pandemic, the issue of a lack of enough existing (and affordable and desirable) homes available to buy actually predates the pandemic by years.
The National Association of Realtors considers perhaps six months of supply of homes at the given rate of sale to be optimal, and even five months would likely be adequate. As of this writing, there are about three months supply of homes at the present rate of sale... but the present rate of sale is just barely above levels last seen in 1995. It has been nearly four years since there were even four months of supply available, and November 2015 was the last time five months was seen. Suffice it to say that "not much available to buy" has been an issue potential homebuyers have been dealing with for years.
With home prices also marching higher, a lack of homes to buy has led more potential homebuyers to instead consider buying a newly-constructed home. New construction doesn't suffer from the same supply concerns as does the existing market, but there can be drawbacks, such as even higher home prices, less optimal geographic locations, HOA concerns and more. That said, new construction does at least provide an avenue for homeownership that may be more readily available than waiting for a desirable existing home to surface.
Buying a newly-constructed home
Buying a home that has been newly-built offers some exciting options that may not be available when purchasing an existing home. New homes allow you to choose items such as kitchen cabinets, flooring and even the floor plan you like.
Nothing beats the feeling of being the first person to live in a newly-constructed home. Everything is shiny and untouched, and new construction also means you won't have to "undo" choices that previous owners have made.
Homebuyers typically buy a brand-new home in one of three ways:
- Buying a house already built (aka a "spec" home)
- Having a semi-custom home built as part of a development
- Designing a purely custom home to their specifications
New construction home buying process
It's important to understand the agent sitting in that new home construction site does not represent you. That agent represents the builder. As such, most homebuyers choose to hire their own real estate agent before they begin the process.
When buying a new construction home, your own real estate agent can help you in a number of important areas, including:
- Negotiating new construction upgrades. It's much easier to get those upgraded counter tops or appliances with the help of your own representation while buying. New construction home negotiation is one of the biggest advantages to having your own real estate agent. Your agent can often negotiate with the builder on things like paint color, or even the garage door style, especially if the housing community is in the beginning phases.
- Overseeing the home inspection. Many homebuyers think they don't need a home inspection when buying a newly-built home. Think again. New home defects can often rival resale problems. The builder's agent isn't likely to push for an inspection, so it's up to you and your agent to make it happen.
- Finance recommendations. Builders typically have one, if not several, preferred lenders that they'll suggest, or may even have their own home financing divisions. Through these, they may offer incentives for you if you allow them to handle the financing of your new home. Be mindful that shopping around for a mortgage lender is always best. You may find that the preferred lender is a good fit, but you may find much better mortgage rates available elsewhere. Be sure and conduct some due diligence when it comes to obtaining a mortgage loan on a new construction home.
About Builder Financing Offers
At a time of high mortgage rates, and to help keep sales of new homes perking along, builders have been offering some financing deals to entice buyers.
Most common among them are temporary or permanent buydowns.
Many temporary buydowns take the form of a 2-1 or even 3-2-1 buydown. These see the loan's interest rate step up by one percentage point each year to land at the final, permanent rate, so they help keep howeownership more affordable in the early years of the loan.
There are a few caveats to know about these. First, you'll be required to qualify for the mortgage amount you are borrowing at the loan's final interest rate. Second, and perhaps as important, the loan's final interest rate may actually be somewhat higher than what the open market would provide at the time you are getting the loan.
By way of example, if the market rate for a 30-year FRM is currently 7%, a 2-1 buydown offer might see the builder offer final 7.25% rate after you enjoy a rate of 5.25% first year and 6.25% second year. You get some budget flexibility and savings in the early years of homeownership, but after the third year, those savings will be eroded over time by the higher, final loan rate.
Does it matter? Maybe, but you'll need to compare total costs over an anticipated time period to find out. It also all depends on how long you remain in the final mortgage, as refinancing to a new lower rate will of course change the calculations. As a savings strategy, you might also consider using the payment differential in year one and year two to prepay the mortgage, which could not only help overcome any value erosion, but also see any future refinance have a smaller loan amount, too.
A permanent buydown may see the builder's lender offer you a below market interest rate for the term of the loan, but more commonly the builder may simply pay a discount point or two to lower the loan's final rate. In this way, rather than you receiving a 7% market interest rate, the builder for example pays a point (a fee equal to 1% of the loan amount) and you receive a 6.75% loan rate for the term of the mortgage. You can of course do this on your own, as well, but it's helpful when someone else pays those costs.
Are the final loan terms better than what you'll find in the open market? There's no simple way to know, so you'll need to at least shop around in your local market to get a sense of what is normal and available for your situation.
Questions to ask when buying new construction home
Always assess the builder's reputation. You can check the builder online and with the Better Business Bureau.
Be sure to take note the completeness of any new subdivision you are considering. Market conditions can dictate whether the new home's price is negotiable or not, and in new home sales, it might be if timing is on your side. Often, the first few units need to be sold quickly to show the public that people want to live in this newly-constructed community, especially one where all the planned amenities aren't yet available. Having an agent on your side when making an offer on a new construction home can be key.
Don't be afraid to question a builder's contract. This is another reason to have a great real estate agent advocating for you, as builder's contracts are typically biased. Working with a professional can help point out the most important items that may or may not be in your favor.
Most newly-constructed homes come with a warranty. However, the coverage offered by these warranties can vary widely. Spend some time understanding the warranty before you go under contract. Don't be shy about asking questions regarding what is and isn't covered.
Know when and how to buy a new construction home
There are pros and cons to buying a new construction home. If you are successful negotiating new construction upgrades and secure the best possible mortgage rates, you may be very comfortable in a home that is up-to-date and move-in ready, and you can spend your free time enjoying your community rather than performing household repairs.
Also see more tips when buying a new construction home.
This article was updated by Keith Gumbinger.
