Building Permits Provide Great Picture Of The Housing Problem

The Difference In Values Between New And Used Homes

In this graph, we’ve plotted the average new home value (in price per square foot) in red, and the average existing home value is plotted in blue. The difference (the Delta) is plotted in gray (highlighted in yellow) and is reported on the right vertical axis.

What I’m looking for in this graph is found by following the delta between the two, and it has fallen to just below 22%, the lowest we’ve seen in thirteen years! Simply put, relative to used homes, new homes are more affordable than we’ve seen since 2008!

What’s interesting is that from 2000 through 2007, the average difference in values between new and used was less than 10%. This is an important fact that explains the big difference between today’s soaring market and the market that formed the housing bubble of 2006.

Twenty years ago, builders were able to produce homes for a large portion of the homebuyer pool. But when loan qualification standards were tightened, the number of buyers in the market sunk well below the production volume that builders were producing.

Now contrast that period of change with that of today. Builders have not been able to produce for the vast majority of buyers, as the delta has been far too large due to increased costs of construction, supply chain issues, labor shortages, and a diminished supply of affordable lots. Instead of building for the masses, builders have been restricted to building for a much smaller segment of the population.

This has left us with a supply imbalance that is completely opposite of the housing bubble years. Back then, there were so many speculators in the market, oftentimes buying new construction homes and then flipping them to other buyers after the homes were completed. There are far fewer speculators and the majority of the inventory today is not coming from builders, rather it’s from those homeowners needing to sell their homes because they are buying another one.

As mortgage interest rates rise, we will see a similar effect on the current housing market as did the change in available loan programs had on the 2006 market. We will see demand decline, but this time we are going to see supply diminish too as the majority of today’s inventory is from sellers who are also buyers. So when buyers no longer qualify for what they wish to buy, they will depart the market taking their potential homes to sell with them. In other words, declining demand will also result in declining supply.

Ultimately, what this graph shows is that the high cost of new construction has been pulling up the average value of existing homes, as the lack of supply that is not being replaced by new homes has created the scarcity that provokes runaway appreciation.

And just like the rest of the economy, inflation is going to strike new construction hard this year. Building supplies, labor, and land are all moving higher (faster) this year. I won’t be surprised if new construction costs/values move up 10% or more this year, and we might even see a trend reversal in the delta shown above. This, in turn, will put even more pressure on existing homes, and runaway appreciation is a very likely outcome.

Equally important, it will be interesting to see how the Fed moves this year, as it controls the direction of the housing market. If the Fed keeps the Fed Funds Rate relatively low, builders will have a chance to start filling the void of homes that our growing population needs. But if the Fed responds rapidly (rashly?), I believe the majority of homebuilding could very well move to investors building homes to lease to people who can no longer afford to buy them.

We’ll keep our eye on all the moving pieces of the housing market and let you know through our regular reports here and on our YouTube Channel. For our readers who are curious where new homes are selling today, you can see a table of the most recent new construction home sales below.

Recent New Home Construction Sales

The following table shows the most recent 1,000 new home sales in Tallahassee. Please note that you can sort the table by clicking on any column header.