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New Home Prices Continue to Rise

Published on Friday - September 27, 2013

While the frantic pace of the housing market has begun to show signs of slowing down, new home prices have taken an alternative trajectory. Recent months have witnessed some of the nation’s largest homebuilders increase their new home prices substantially, despite the tempering of existing properties. Of course, new homes demand a premium when compared to those that have already been on the market, but some analysts are concerned that the divide is widening too much.

According to Paul Diggle at Capital Economics, “The big picture is that new-build house prices fell by less than existing house prices during the crash and have risen by more during the recovery.” The trend may force builders to slow their price growth faster than existing home sellers.

The latest S&P/Case-Shiller Home Price Index has recently acknowledge a 12 percent increase in existing home prices from this time last year. The numbers revealed by the index are representative of a three-month running average. Conversely, new home prices were the beneficiary of substantial increases in the third quarter of 2013. Some builders’ homes increased by16 percent annually, while those built by KB Home surged an impressive 23 percent.

According to Stuart Miller, Lennar’s CEO, “We continue to see long-term fundamental demand in the market driven by the significant shortfall of new single-family and multi-family homes built over the last five years.”

When referenced together, it is easy to differentiate between new home prices and those that have already been on the market. Accordingly, a newly developed Lennar home averages $291,000. That amount is a staggering $32,200 more than the average existing home price in August. The difference in existing homes and new homes is much higher than historical norms.

According to Ivy Zelman, an analyst familiar with the market, “We believe that analyses that suggest new homes are either unaffordable or priced at an abnormal premium to existing homes are flawed,” Zelman wrote in a note to investors last month. “In AZ, CA, FL and NV, we conclude that prices are still 15 percent lower than the 2006 peak, which excludes an adjustment for an increasing size of new homes and would be further compounded by seven years of inflation.”

While new home prices increased more than expected, they are projected to temper over the next few months. This is a result of the season and not necessarily related to market indicators. The fall and winter months are traditionally the slowest for the housing sector. Resulting demand will likely weaken new home prices. However, make no mistake, the historically low supply has continued to push property values to their current point.

“Construction of single-family homes has been depressed since late 2007, while the U.S. population has increased by more than 12 million over that time,” said economist Patrick Newport of IHS Global Insight. “Since underlying demand is, by our estimate, running at a rate nearly twice that of housing completions, the shortages are likely to get larger before getting smaller.”

While new home prices may not maintain their torrid pace, expect them to remain strong.

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