Why New Construction Might Cost Less Than You Think | NerdWallet

U.S. housing market has heavily favored sellers for the past few years and a lot of potential homebuyers have grown tired of waiting for the tide to turn in their favor. Unfortunately, it looks like they're going to have to keep waiting. We are not expecting a big influx of inventory or for list prices to drop precipitously anytime soon. One place that buyers, especially first-timers, might not have thought to look is new construction. It can be surprisingly affordable and it's not just for high-end custom builds. Let's talk about reasons you should consider new construction. To learn more about this topic, I turn to my colleague Holden Lewis, who's written about new construction. What are some reasons that homebuyers should consider new construction? Oh, there's one really, really big reason and it's this. There aren't enough existing homes or used homes for sale right now. The market is really, really thin. At the end of April 2023, there were about a million homes for sale. In April 2019, there were more than two million. Normally, in one year, there are about eight used homes sold for every one new home. Well, this year, there are about five used homes sold for every one new home. So what that means is, look, you're really, really upping your odds of finding the house that you want if you include new construction in your search. And in this market, you need the help. You need all the help you can get. What are some common misconceptions that folks have about buying new construction homes? One of them is simply that I think a lot of people think that you have to be some kind of millionaire to have a new construction home. That you have all the time to buy the land and hire an architect and source Carrara marble from Italy and all that kind of stuff. And no, no, no. That's really not what most new construction is. Most new construction is just simply housing developments that are already under construction. And typically, what happens is you walk into a model home and you're greeted by salespeople and they ask you what kind of lot you want and what kind of countertops and that kind of thing. So, so many new construction homes are just they're middle class homes in brand new developments. And so that's a pretty different process from if you were looking for like a full on custom home where you're buying land or you're doing an elaborate type of loan in terms of buying a new construction home. The financing for something like that is much more straightforward, right? That's right. If you're building a house, there's just these esoteric kinds of mortgages you, you can get, you know, there's like construction to permanent or they have a different kind that you can close once or close twice, that sort of thing. When we're talking about kind of just your typical American home buyers buying a new house in a development, you're just closing on a one time, you're just getting a regular old mortgage. Now, maybe that house is under construction or maybe how, maybe they haven't even broken ground or the house might be completed and ready to move in, but you're not like hiring any architect. You're not overseeing construction. They're doing all of that. It's just kind of an assembly line house that you're going to end up occupying. So in terms of financing, a lot of the like bigger builders will offer their own financing, right? They'll offer their own mortgages. If that's something that's being offered to you, what should you consider? Like what are our questions that you might want to ask? Some of the questions to ask are, can you give me some kind of break on the interest rate? And the answer nowadays is very often, yes. So here's what they'll do. Sometimes they'll just buy down your interest rate permanently. Like let's say if you just went to any old mortgage lender, they would quote you a rate of six and a half percent. Well, the home builder, in lieu of giving you say a break on the price of the house, they might kick some money to their lending division to decrease your interest rate. So with one lender, it might be six and a half percent. With the builder's lender, maybe it's six percent or five and a half percent. And that would be a permanent, that is your interest rate for the life of the loan. They'll also offer buy down mortgages, which are loans where they might do a thing where for the first year you're paying payments on a four and a half percent interest rate. Then the year after that, a five and a half percent interest rate. And then a year later, finally you're doing that regular old six and a half percent interest rate. And what that does is it gives you time to just sort of sort your finances because you've probably exhausted all of your savings just not only on the down payment, but buying furniture and tools and gosh, you know, trash cans and all that kind of stuff. Lawnmowers, right? So that gives you a little bit of breathing room to kind of rebuild your savings. And also, frankly, interest rates are kind of high right now. So that might give you some room to refinance later at a lower interest rate. So if you're looking at new construction and, you know, the lender's offering you financing or they're offering you, you know, a home loan, should you still shop around with other mortgage lenders? Yeah, you should definitely shop around for other mortgage lenders because it's always a good idea, no matter what your circumstances are, to comparison shop mortgage loans. Freddie Mac does these surveys every few years in which they just every time they definitively prove that people who get, say, three or five mortgage quotes end up with lower interest rates on their loans than people who just shop at one lender. So the builder's lender might be offering you a really awesome deal, but it really does pay to go to at one or two more lenders just to find out what kind of deal that they'll offer you. Yeah, because I'd imagine on one hand, using the builder's lender is probably really convenient. They work with them all the time, right? You can probably expect that underwriting and closing to hopefully go pretty smoothly. And so that might, you know, the builder might be saying like, well, you know, it'd be great if you went with our guy, but if you can get information, if you can get quotes from other lenders, there's the possibility that you could try to use that as a negotiating tool too, right? To try to be like, well, you know, you're offering me this interest rate, but here's this, you know, brick and mortar bank offering me this other interest rate. Is there anything you can do to, you know, sweeten this deal for me? That's right. You know, I mean, if you get a really good offer from a competing lender, yeah, you can take that to the builder's lender and say, hey, can you match this? Aside from the actual home loan and stuff like interest rates, what are other tactics that buyers could potentially use or pursue in order to get more for their dollar with a home builder? Well, the main thing that people look at is upgrades. For example, let's say you want fancier appliances or nicer looking counters. I mean, me, I'm a Formica guy, but I know that most people are like really into marble and stuff like that. So you can request those upgrades and you can request discounts. I mean, these builders are buying truckloads of, say, countertops. They're buying dozens and dozens of refrigerators. They're getting good prices on those. And so, you know, if you can get an upgrade on a slightly nicer refrigerator, well, it's probably really not costing that builder a whole lot. So they might be pretty willing to give you upgrades on materials. And then there's things like locations. Corner lots usually cost more. Maybe a lot on a cul-de-sac might cost more. Well, maybe you can just, if you're one of the very first people in that development, maybe you can swing a deal on that location and just pay the price for a regular lot while getting a corner lot. Those are the kinds of things that you can ask about. Thinking about stuff like, oh, it's new appliances and, you know, since it's new construction, basically everything's brand new. One thing that I think a lot of homebuyers might wonder is, okay, if you're doing new construction, do you still need to get a home inspection? I really think it's a good idea to get a home inspection because, look, these are human-made things and people make mistakes. People overlook things, not because they're bad at their job, not because they're sloppy, not because they woke up with a hangover, but just because people make mistakes. That's just one of those things. And so having an inspector look at the house is a really good idea. Do all the outlets work? Is the plumbing okay? Did every bolt get screwed down correctly? You're really hoping for that kind of insight and just make sure that they're testing the furnace and the heater in the summer or they're testing the air conditioning in the winter because you don't want the seasons to roll around and then discover, oh, darn it, I wish I'd had an inspection. That's a really good point, Holden. Thanks for talking to us today. Thanks for having me. It was a real pleasure. I'm Kate Wood and I write about mortgages and home buying for NerdWallet. 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