New Construction Home Sales Are Surging for 2 Reasons

I spend way too much time browsing houses on Zillow, but I'm not alone in my hobby. The company says it has more than 200 million unique viewers every month. One thing I've noticed in all my hours of scrolling is that there are far fewer existing homes for sale than there used to be.

And the latest National Association of Realtors (NAR) data backs up my anecdotal observations. In May, existing home sales were down 20% compared to last year.

But while existing home sales have fallen, another interesting trend has occurred. The latest U.S. Census Bureau data shows that sales of new construction homes surged 20% in May compared to the same period last year.

There are two reasons why home buyers are seeking out new homes and shunning older ones.

1. New homes may have more financial incentives

In June, more than half of home builders offered incentives to home buyers, according to the National Association of Home Builders. Incentives may include down payment assistance, a lower mortgage interest rate, or a builder covering the closing costs for a buyer.

For example, the average amount buyers pay for closing costs -- which include the fees paid to lawyers, lenders, and home appraisers -- is about 3% to 6% of the loan amount, according to Rocket Mortgage. But some home builders are willing to pay large portions of the closing costs. Two home builders in my part of the Southeast are currently offering between $8,000 to $15,000 toward closing costs.

So let's say you're buying a new construction home for $300,000, and your closing fees are 4% of the home price, equalling $12,000. If the builder offers $10,000 toward closing costs, you'd only need to pay $2,000 in closing fees.

While home sellers can offer some assistance like this too, there's one thing most of them can't do: Give you a lower mortgage interest rate.

As of this writing, the current interest rate for a 30-year mortgage is about 6.86%, but Yahoo Finance recently reported that many new construction home buyers are getting a 5% interest rate. One home builder in my area offers an interest rate as low as 4.99% on select homes if you use that company's preferred mortgage lender.

The difference between those two interest rates is significant when you compare the monthly mortgage payment. If you buy a $300,000 home -- with a 20% down payment -- and have a 4.99% interest rate, you'll pay $288 less per month than if your interest rate is 6.86%.

With the median selling price for a house reaching $416,300 in May -- up 31% over the past three years -- it's no surprise home buyers are looking for any type of financial incentive they can get.

2. There are fewer existing homes on the market

Even if prospective home buyers would prefer to purchase an existing home, there are fewer to go around these days. A recent report from the NAR found that 27% of buyers who purchased new construction homes did so because of a lack of inventory of previously-owned homes.

The problem for potential buyers is that some homeowners who purchased a home over the past few years don't want to sell because they have a lower mortgage interest rate than what's currently available. The result is that the current supply of existing homes on the market is about half of what it was in 2019, per NAR data.

New homes historically account for between 10% to 15% of available homes on the market. But with far fewer existing homes being listed for sale now, new homes made up 31% of total housing inventory in May, according to the National Association of Home Builders.

More of the same for the housing market

Recent comments by Federal Reserve Chairman Jerome Powell indicate that the federal bank may continue raising interest rates to fight inflation. If it does, then mortgage interest rates will likely rise as well. All this means there could continue to be far fewer existing homes for sale than in the recent past -- and far fewer homes for me to swipe through on the Zillow app.