Better to Buy or Build?

This question comes about in almost every new client conversation I have. There are those diehards that refuse to live in a new house, and there are those who want a maintenance free home from the start. (no such thing by the way – but new homes are certainly less). Personal tastes aside, there is always a financial question regarding which is better. It is the goal of every seller, whether builder or homeowner, to maximize their price at the sale of a home. There may be some other factors on the table regarding timing, but it all comes down to the final net price to seller. Always.

So, prices tend to go up and down in tandem for resale and new construction. Sometimes, one lags the other, but in general, when prices are rising, they are going up for both types of sellers. For that reason, the percentage of sales that are new construction tend to be pretty flat in good times and bad. I’m not saying that new homes keep selling, I’m saying that as a percentage of total sales, they remain fairly constant.

When we look at the last decade, this is certainly what we see. From 2003 to 2011, the percentage of total sales that were new construction (Albemarle and Charlottesville only) remained between 16.7% and 18.0%, and in 7 of those years, it was even tighter, between 16.6% and 17.1%. Not a lot of variance.

But in 2012, we saw a major shift. In Oct of 2011, builders began getting advance warning from their suppliers that prices were going up. Drywall, lumber, you name it… Prices went up. And we’re not talking 2% here. In 2012, prices on drywall went up roughly 30%. And in January of this year, prices went up another 20%+. 2012 saw lumber prices up 44%. And that drives new home prices up. Nationally, the average new home contains roughly 45% of it’s cost in materials. And when they go up as significantly as they have, there is little way to protect the profit without ratcheting prices up.

But good news may be on the horizon. Lumber commodity future point to as much as a 25% decline in prices from mills as China demand decreases and output from Canada increases.

So, here is the interesting thing. 2012, saw the first major drop in new construction. Builders may not have even noticed. The actual number of new homes sold in 2012 (266) was the highest in any year since 2007 (376 – so we are still a long way off the bubble path). But while there was a 4.7% increase in new construction sales in Charlottesville and Albemarle, that paled in comparison to the 15.7% increase in total sales. End result is that the percentage of homes sold in Charlottesville and Albemarle that were new construction went from 16.7% to 15.1%. (Explanation of the Graph: Blue and Green columns represent the total number of homes sold and total number of new construction homes each year. The yellow line is the ratio of new construction to total market.)

NewConstructionWhat brings this back? Two things are possible, likely a combination of the two will play out.

The first is that material prices come back down. As the lumber news points, there should be some relief from manufacturers as output increases. This won’t bring it back to par, but it will allow some relaxing of prices.

The second option is that resale homes will see a price increase. (It has been many years since I said that and it feels pretty good.) As long as resale prices remain depressed, the builder market will have a tough time competing. My bet is that 2013 sees better numbers than 2012 for new construction, but not back to the 2011 16.7%.