With scant housing inventory continuing to hamper the market, frustrated home buyers are shifting their focus to new construction homes, according to a Redfin report.
Of all single-family home sales nationwide in the final quarter of 2023, 31.8% were new construction, per Redfin. The highest fourth-quarter reading on record is 31.9% in 2022.
With nearly 90% of homeowners sitting on mortgage rates below 6%, many potential sellers are staying put to keep their lower rates, adding further constraint to the housing market.
The Outlook for New Construction in 2024
Several gauges suggest that this trend of home shoppers swarming toward newly built homes will continue.
For one, home builder outlook is on the rebound, with the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) increasing from 37 to 44. The index monitors builders’ sentiment, and a reading of 50 or above indicates favorable conditions for new construction.
Between May and August 2023, the index was at or above 50 before taking a nosedive in the fall when mortgage rates surged to nearly 8%. However, in December, builder sentiment rose slightly as rates eased.
Moreover, new single-family building permits increased in December for the 11th consecutive month, according to recent data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD).
Some builders may also continue offering incentives to seal the deal, such as free or reduced-cost upgrades, paying closing costs or providing financing support via mortgage rate buydowns.
NAHB chief economist Robert Dietz forecasts a 4% increase in new single-family home starts in 2024 amid slowing economic growth, lower inflation and declining mortgage rates.
Prebuilt vs. Custom: Which Type of New Home Is Better?
If you’re thinking about buying new construction, one essential factor to consider is whether you prefer a prebuilt home or to custom-build your dream home from the ground up.
A major advantage of prebuilt homes is that they generally come with less hassle, as you don’t need to coordinate with architects and home builders. Moreover, builders often have prior experience constructing prebuilt homes with established layouts—especially homes in planned communities—so they rarely go over budget.
However, prebuilt homes can be more generic and may not satisfy your preferences if you’re looking for a unique style, a specific size or certain conveniences.
Building a custom home will require you to get a construction loan. Construction loans are variable-rate loans with shorter terms and higher rates than traditional mortgages.
Additionally, construction loan lenders require borrowers to include detailed building plans and a construction budget as part of the loan application. Many require a higher credit score to qualify.
Should You Buy a New Construction Home in 2024?
One of the benefits of purchasing a newly constructed home compared to an existing home is that you get the benefit of being the first one to reside in it.
Even so, it’s essential to keep the following pros and cons in mind when deciding if new construction is the best move for you.
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