New Homes are Becoming a Bad Deal in Weak Markets

Home mktA new home, the dream of many would-be buyers, makes less and less financial sense in many places.

A wave of foreclosures has driven down the cost of previously occupied homes and made them even more of a comparative bargain. By contrast, new homes have become more expensive.

The median price of a new home in the United States is now 48 percent higher than that of a home being resold, more than three times the gap in a healthy housing market.

Such a disparity can be a drag on the economy. New homes represent a small fraction of sales, but they cause economic ripples, bringing business to construction and other industries. Sluggish new-home sales deprive the economy of strength.

“A lot of people are saying, ‘If I can get a great deal on a home already on the market, why go through the headaches of getting a new home?'” says Mark Vitner, a senior economist with Wells Fargo. “There’s a relatively small group of people who have the credit, have the down payment and are secure in their jobs that can go out and buy new.”

The gap is widening because prices of previously occupied homes are falling fast, pulled down by waves of foreclosures and short sales. A short sale occurs when a lender lets a homeowner sell for less than is owed on the mortgage. New homes aren’t directly affected by such sales.

The median price of a new home ? the price at which half the homes sell for more and half sell for less ? has risen almost 6 percent in the past year to $230,600, even though last year was the worst for sales in nearly a half-century.

Slowed by those higher prices, new-home sales have plummeted over the past year to the lowest level since records began being kept in 1963. The government provides fresh data on new-home sales Wednesday.

By contrast, sales of previously occupied homes have fallen almost 3 percent in the past year. Prices have dropped more than 5 percent. In February, the median price for a resale was $156,100, according to the National Association of Realtors.

That adds up to a price difference of $74,500, or 48 percent, the highest markup in at least a decade. In healthier markets, a new home typically runs about 15 percent more, according to government data.

Home prices and sales still vary sharply among metro areas. Cities with more foreclosures tend to have more resale homes that have languished on the market and are priced at a bargain. That makes new homes in those areas comparatively expensive.

In Atlanta, for instance, where foreclosures accounted for one in every 23 homes sold last year, the median price of a previously occupied single-family home was $109,900, about 12 percent lower than a year ago, according to the Georgia data firm Smart Numbers. The median price of a new home was more than twice that.

“That’s as much of a difference as we’ve ever seen,” said Steve Palm, president of Smart Numbers. “New homes can’t compete, and that means jobs.”

An average of three jobs and $90,000 in taxes are created for each home built, according to the National Association of Home Builders.

In some areas, older homes were more expensive before the housing market bust. That was especially true in urban neighborhoods with little or no room left to build on. But now, buyers get their pick even in some of the trendiest places.

That’s what Robert Rost is finding in central Phoenix. Rost doesn’t want to commute far to his job. He’s been looking for a home for about five months but can’t find new properties in the neighborhoods where he wants to live.

“I don’t want to commute 45 minutes to an hour a day one-way,” the 38-year-old computer engineer says.

Homebuilders have taken notice. Residential construction has all but come to a halt. Builders broke ground last month on the fewest homes in nearly two years. And building permits, a gauge of future construction, sank to their lowest in more than 50 years.

Many builders are waiting for new-home sales to pick up and for the glut of foreclosures and other distressed properties to be reduced. But with 3 million foreclosures forecast this year nationwide, a turnaround isn’t expected for at least three years.

Don Eyler, who has owned E and R Construction in Terre Haute, Ind., for three decades, blames the banks. He says people are still interested in having a custom-built home but can’t finance the purchase. Tighter credit has made it harder to get larger loans.

Eyler typically built eight homes a year before the housing boom and bust. Now, he’s averaging just about five. And he’s making less profit on each.

“We hope we can stay in business until it gets better, but the turning point is this year,” Eyler says. “If it doesn’t change, we’ll have to do something different.”

Contributing to higher new-home prices is the rising cost of building materials.

Fewer new homes sold means fewer jobs added to an economy struggling with 8.9 percent unemployment. About 2.2 million overall construction jobs have disappeared since the housing boom went bust. That’s nearly a third of the people the industry employed in January 2007.

Workers in residential construction have fared even worse than other construction employees. Homebuilders cut nearly 1.3 million jobs in that time, or 39 percent of total payrolls.

Besides generating jobs in construction and other fields, new-home purchases tend to help the economy because buyers are more likely to buy new furniture, appliances and other amenities.

There’s also the psychological factor. In good times, most homes rise in value. But new homes historically have risen faster ? by an additional 1.5 percent a year, according to Realtors and census data.

When homes appreciate in value, people feel they have more money. So they spend more.

“When you have more net worth, especially in your home, you feel richer,” says Chris G. Christopher Jr., senior principal economist at IHS Global Insight.

AP Business Writers Christopher S. Rugaber in Washington and Alex Veiga in Los Angeles contributed to this report.

Source: The Associated Press.