Maybe It’s the Other Way Around

“New construction often brings down the value of older homes, which wear out and go out of fashion, dragging down prices.”

–Robert J. Shiller, “Housing Market is Heating Up, If Not Yet Bubbling”; The New York Times (9/29/2013)

It’s a classic glass half full/half empty debate:  housing bears such as Shiller (one-half of the “Case-Shiller” index) see new construction as posing a threat to existing home prices.

new vs. usedAfter all, if a new home with all the bells & whistles just sold for $1 million, how much would the owner of a same-sized but dated home have to discount to attract a Buyer?

At least to this observer, though, it’s not at all obvious that new homes exert a downward (vs. upward) tug on the value of existing homes.

How Big a Discount

Shiller’s right about at least one thing:  new homes, on average, sell at a premium to existing homes.

Which only makes sense:  that relationship applies to cars, TV’s, appliances, clothes and practically everything else (assuming the item in question isn’t a vintage, ’57 Corvette or a Stradivarius violin).

The issue is how big a discount, and whether the tug is “up” or “down.”

Arbitrage Opportunity?

At least anecdotally, I’m seeing evidence that galloping new home prices — at least in some upper bracket Twin Cities neighborhoods — are pulling up existing home prices, and bells whistlescreating an opportunity for Buyers willing and able to do some updating.

For argument’s sake, assume that the “average” new home fetches a 25% premium.

If the cost of new construction goes from $1 million to $1.2 million, a similar-but-older home in the same neighborhood becomes a more compelling buy at only $750k.

Adding to the appeal of the latter:  due to limited availability (or building restrictions, like in Edina’s Country Club neighborhood), sometimes it’s not possible to build new construction in the same location as existing housing.

So, a Buyer desiring new construction has to settle for a further out, less desirable location.

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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