Real estate is seeing sustained strength throughout the country, but which area is going up faster—existing or new homes?
The answer to this question is key in evaluating the potential of a real estate project and exactly how much an investor wants to put into a potential project. While refurbishing and flipping existing homes can offer fast profits, new developments often appeal to a larger pool of buyers, offering high liquidity and lower risks.
With both possibilities before an investor, a decision needs to be made not only regarding which choice will make the most money, but also which one fits the investor’s risk profile, skill set, and particular local market. A big factor in this calculation is deciding which is actually going to see continued price growth. Let’s take a look at the data to see how these two markets have been trending and where they are likely to go in the future.
New Home Prices
New home prices have risen for the last three years, with the biggest price gains coming in 2013. That’s according to a study by the National Association of Home Builders, who tracked the prices of new homes across the country. The NAHB concluded that home prices rose 11.1% in 2013, which was over 22% higher than the growth rate in 2012. That massive growth in home prices stunned many economists at the time, who were predicting a moderate slowdown in home prices and sales as a result of rising interest rates.
In 2014, prices just continued to rise, even after the big gains in the prior year. At their highest point in August, median home prices rose 14.3% from the prior year, while posting gains in all but two months of the year. By the end of the year, new home prices had risen 5.8% on average.
What was driving the strong price growth? Low interest rates were part of the story, but another part of the story was improving confidence from homebuyers thanks to a growing economy. The U.S. GDP grew by 1.9% in 2013 and the stock market saw an incredible 30% rise for the year. The wealth effect was rippling throughout the economy, affecting everything—including demand for new homes.
Existing Home Prices
Existing home prices saw comparable but lower growth in 2013, according to the NAHB, which saw the median existing home price rise 11.4% in 2013. In the next year, existing homes saw more modest price growth in every month, ending up about 3.9% on average by the end of 2014, according to the National Association of Realtors (NAR).
The good news about existing home price growth is that it’s been relatively steady. While prices declined for two months for new homes, existing homes saw sustained growth in each month of 2014, according to the NAHB.
Looking to the Future
With the state of the housing market uncertain, economists believe there is more reason to be optimistic about both new and existing homes. NAR President Chris Polychron recently noted that changes to FHA mortgage insurance premiums will lower monthly payments for homebuyers, and the FHA’s new rules are likely to bolster demand for homes in the future. “NAR is a strong supporter of the FHA and its vital role in the mortgage marketplace for homebuyers,” he said in a statement.
Additionally, existing home prices have gained for 34 months in a row, and “a drop in housing supply” noted by NAR Chief Economist Lawrence Yun indicates that prices are likely to rise further in the near term. However, Yun remains concerned about the affordability of homes in the future, indicating a need for salaries to go up to help buyers afford houses. “Housing costs – both rents and home prices – continue to outpace wages and are burdensome for potential buyers trying to save for a downpayment while looking for available homes in their price range,” Yun said.
To benefit from the rise in prices that economists expect for 2015, real estate developers need to do their due diligence and decide whether new or existing homes are the right project for them and their market. When they’ve made their decision, they’ll need financing. Socotra Capital is here to help with years of experience lending to real estate developers, rehabbers, and flippers throughout California.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.