You have to admit that the real estate industry is way out in front of the auto industry when it comes to marketing lingo.
The latter, for instance, gives us a choice between “new” and “used” cars while the former offers new and “existing” homes.
Unless we’re contemplating buying a priceless antique, it’s safe to say that most of us prefer new to used, whether it’s cars or homes.
In fact, a 2014 Harris Poll survey found that 41 percent of Americans prefer a newly-built home.
Can you blame them? You won’t get that “new car smell” in an old beater any more than you’ll get the satisfaction of knowing that nothing in a new home has ever been touched or used by anyone else. No grease on the appliances, smudges on the walls or pet or kid odor in the carpet.
It all boils down, like many things in life, to how much we can afford to spend. For instance, remember that survey I mentioned earlier?
The 41 percent of Americans who would prefer a new home over an existing one went on to claim that they weren’t willing to pay the extra money required to buy a new home.
Now, notice I said “buy” one; it’s not necessarily more expensive to own a new home but may be more expensive to purchase one. I’ll clear up that confusion in a minute.
Price considerations
Most of the homebuyers that we have worked with have one overriding concern when looking at homes: The price.
As a general rule, you’ll pay more for a newly-built home than you will if you buy an existing home.
Nationwide, for example, the median price of a newly-constructed home was $330,800 in the third quarter of 2019 according to the U.S. Census Bureau.
The median price of an existing home was $274,000. That’s a $56,800 difference, which is slightly more than the so-called 20 percent “new home premium.”
Keep in mind that the list price of the new homes is for the basic model and doesn’t include upgrades, which can cause the price to rise significantly.
One final note when it comes to the price of a new home: Negotiating on the price, an option when you purchase an existing home, is typically not an option available to you when you purchase new construction.
Ongoing costs
A mortgage payment is comprised of the loan’s principal, interest, property taxes and homeowner insurance. While all aspects of the payment should be considered when purchasing a home, we’ll take a look at the two most significant.
Property taxes
Taxes levied on an older home are typically lower than those for a new home. But, that doesn’t tell the whole story because for the first year to two years, taxes on a new home may be significantly lower.
Why? Because current-year taxes are based on the value of a home as of January of the previous year.
For example, if a home was completed in June 2020, the taxes for the property will be based on its value in January 2019. Most likely, at that time, there was no home, just a dirt lot. So, for the remainder of 2020, the homeowner would pay property taxes based on the value of a plot of dirt.
In 2021, the homeowner will pay taxes on the home’s value as of January 2020. Remember, the home wasn’t completed until June, so the property’s value was still quite low, ensuring another year of low property taxes.
This difference can be significant, possibly saving the new homeowner up to $250 a month for up to two years. We aren’t tax professionals, though, so this is an issue to run by your accountant.
Insurance
Consider that fourth “leg” of the mortgage payment — insurance. The new home definitely wins when it comes to homeowner insurance, generally being less expensive to insure.
The primary reason for this is that, with newer and more cost-effective building methods, new homes cost less to rebuild or repair.
There are additional factors to consider, however. These include:
- The home’s location – homes built in areas with weather risks (floods, wildfires, etc.) will cost more to insure than new homes located outside these areas.
- Proximity to a fire department – insurance rates are typically less for homes located in close proximity to a local fire station.
Maintenance
No, home maintenance costs aren’t a part of a monthly mortgage payment, but they do factor in to comparing the cost of owning a newly-built home vs. an existing home.
Although new homes can have problems, many builders offer a home warranty. As a general rule, you can plan on almost a decade of repair-free ownership when you purchase a newly-built home.
One aspect of the new-home purchase not often addressed is the home’s energy efficiency – a true money saver over the purchase of an existing home.
New homes are built with newer, better insulation and energy-efficient windows, for example. This significantly cuts the cost of heating and cooling the home.
As homes age, the need to repair things happen more frequently. This is why older homes in a managed community, such as townhomes and condos, typically have higher HOA fees.
There are a number of other benefits to purchasing a newly-constructed home, including that you can choose the floorplan that best fits your family’s lifestyle, you can choose the location within a neighborhood and, if you can afford it, you can choose upgraded features for the home.
If you’re interested in viewing newly constructed homes, reach out to us. We’re happy to help you avoid some of the more common pitfalls in the process.
