New-Home Sales Don’t Tell the Whole Story

The New York Times reported yesterday that sales of new homes fell 8.5% in March compared to a year ago. According to the Times, new home sales are running at an annual pace of 526,000, the lowest since October 1991.

Sounds bad, right? It’s certainly not good news, but it’s not as bad as it seems, for three reasons.

One. What the Times article neglects to point out is that new-home sales are dwarfed by existing-home sales. In fact, existing-homes account for about 85% of all homes sold, with new construction representing the rest.

Locally, Minneapolis and many of the mature, close-in suburbs have very few or no new homes. For example, in St. Louis Park, on Minneapolis’ west border, more than 1,000 single family homes have sold the last two years. The number of those that were new construction? Five.

So depending on the part of town you’re talking about (see next), new-housing statistics can loom very large — or be practically irrelevant.

Two. New homes tend to get built where land is available and cheap. Where’s that? At least in the Midwest, on the periphery of existing development, typically in the remote ‘burbs. In the Twin Cities, that includes places like Farmington, Albertville, and Otsego.

What all those places have in common is that they are long commutes from the city center; with the price of gas skyrocketing, suddenly they are expensive, long commutes. Add to that a weak economy, lack of infrastructure, and frequently lagging services (groceries, dry cleaners, etc.), and it’s surprising that new-home sales in these areas aren’t off more.

Three. There is a positive, flip side to the new-home sales “coin” that the media is leaving out: namely, that the same factors that are hurting new-home sales on the outskirts are bolstering demand for existing homes in closer-in, more established areas.

Take St. Louis Park as an example again. In 2006, the low $200k’s was enough to buy a 1 1/2 story, 1,300 square foot expansion built in the late ’40’s or early ’50’s with three bedrooms and one, maybe two baths on a standard, 40′ x 120′ city lot. Fast-forward to today, and that same $220k or so buys . . . pretty much the same house.

Homeowners who bought two years ago may be disappointed that their equity hasn’t increased, but it’s hardly the rout that one might expect from the media’s housing coverage.

In places like St. Louis Park, the main consequence of the buyer’s market/credit crunch is that, sprinkled in with the aforementioned $200k-plus homes, there is now another, lower tier of $150k-$175k “fixer’s,” short sales and foreclosures. To be sure, that’s not great news if one happens to be down the block from you, but it’s also not really competing with your home, either (due to condition, financing requirements, etc).

As they say, all real estate is local. In a market with so many countervailing trends and so much going on beneath the surface, that’s never been more true.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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