I retired as a custom home builder a few years back. One contributing factor was the lack of a "split" between new values and existing home sales in my market. I have repeatedly read that in a healthy market, new construction should be valued at 30% more than existing, and in the depths of the recession, when little new inventory was being built, it had dropped to 15%. My market is still suffering from a gross excess of inventory, and changing demographics. The demographics problem being that it is largely a middle class, second home market. As middle class families hit the age where they would traditionally start shopping for a second home, less of them have the income, and quite honestly, more of them are smart enough to pass on doing so. As a result, a lot of builders left the market, and the remainder tend to be bottom feeders, producing some pretty marginal product, and do so at exceptionally tight margins.
JMHO, but my take is that a health market has two parallel markets operating in the same space. Existing inventory is valued using very valid current metrics, and is typically easily justified. New construction is another animal completely, and valued by those willing to pay the price. The price includes a heavy burden of costs that bring little value to the property itself, including impact fees, permit costs, overhead, marketing and profit. Once the house ages a bit, the market is no longer willing to compensate for those, now forgotten, costs.
I watched my buyers with great interest over the years, and many became friends. I was struck by two issues that many encountered, as new home buyers. First, since they were often second home buyers, who lacked available free time, or were not DIY oriented, many ended up spending shocking amounts on landscaping, yards, and exterior improvements. Obviously, an existing home wouldn't have most of this cost, and in a health market be priced lower in the first place. Second, many ended up deciding that the whole vacation home experience wasn't the dream they thought it would be. It isn't unusual to see my customers list the home, right around the fifth year of ownership. The sad part of this is that the total cost of selling at that point, including interest on the loan, upgrades to the home, furnishing, closing costs (x2)
and other expenses, typically ended up costing about a quarter of the purchase price. Had they bought a new home in a normal market, the damage would of been a lot worse.
