New Home Construction: Piggy Bank Or Used Car?

The other day, an “06880” reader e-mailed me in an agitated state. She complained that because home buyers these days want only new houses, realtors only take clients to see those properties. As a result, they sell for premium prices.

She cited a new 5,000-square foot home with a $3+ million price tag. A “pre-existing” house of the same size, style and quality fetches “only” $2.2-$2.4 million.

The e-mailer said that everyone wins: builders for obvious reasons; realtors because of higher commissions; the town because of higher taxes.

Except, of course, the seller. She described a new home that sold for $5.4 million in 2010. It went on the market this year for $4.295 million. That’s down more than $1 million — and it was first built and sold in the middle of the financial crisis.

This new home in the Compo Beach area is 4,569 square feet, on 0.52 acres. It's on the market for $4.975 million.

This new home in the Compo Beach area is 4,569 square feet, on 0.52 acres. It’s on the market for $4.975 million.

I could have an opinion on this. But it wouldn’t be based on anything close to actual knowledge or insight.

So I called 2 of Westport’s most experienced and respected realtors: KMS Partners at Coldwell Banker’s Karen Scott and Mary Ellen Gallagher. (Full disclosure: They are also good friends. And I coached their sons as Staples High School soccer players.)

The women said: Yeah. The e-mailer is right about the prices. Realtors often talk about this very subject.

However, they said, there’s more to this than meets the eye.

The phenomenon is not the fault of realtors, they said. It’s driven by buyers.

When prospective home-buyers start looking at existing homes, they may not find every amenity they expect. Existing homes may have smaller rooms, or lack the open floor plan of new homes.

Once they see new construction, every “older” home — even relatively new ones — pales by comparison.

Buyers start yearning for a totally new home. Newness becomes more important than anything else — even a busy street, or small lot.

The reality, Karen and Mary Ellen said, is that most buyers today understand they will pay a premium for new construction than a lower price for an already-lived-in home — even one that’s been lovingly maintained.

This Green's Farms area house was built in 2006 -- 10 years ago. It's 3,993 square feet, sits on 0.51 acres, and lists for $1.799 million.

This Green’s Farms area house was built in 2006 — 10 years ago. It’s 3,993 square feet, sits on 0.51 acres, and lists for $1.799 million.

But here’s the catch: New homes are not the “piggy banks” home buyers believe they should be. Homes are a commodity. Their market value is driven by various economic factors and market conditions — for example, supply and demand.

Think about a new car. The moment you drive it off the lot, it starts to depreciate.

It’s the same with new construction. The moment the first owners move in, it’s no longer “new.”

Unfortunately, Karen and Mary Ellen noted, some owners of new homes don’t realize that fact until they put their no-longer-new home on the market.

Realtors are in a tough spot. They may try to explain the reality of new-vs.-older construction. But many buyers — bedazzled by new homes — don’t want to hear it.

They figure they’ll enjoy their new home, and deal with the resale price many years down the road.

And, Karen and Mary Ellen admitted, builders would not be building at the rate they are if buyers were not buying.

So the next time you see a perfectly good “old” house torn down, and a brand-new home going up in its place, understand the reason: There’s a demand for that new construction.

Until it’s time to sell.

 

24 responses to “New Home Construction: Piggy Bank Or Used Car?

  1. Charlie Taylor

    Thanks Dan…this explained the mad construction of Mc Mansions in Nashville and new tear downs of great old properties….ah the human condition! Festers!

  2. Matthew Mandell

    FYI – The newer homes don’t bring in more taxes due to their sale price. The Assessor values the house. Sales like this will of course bring up the values, but in the end if it is the same as other houses, just newer, the tax will be the same as the others for the most part. Just like Dan said, once they move in, it isn’t new and the value drops.

    So we should start to offer certified pre owned houses, just like cars. Just got me a 2 year old van for a great price. It wasn’t new, but I paid a whole lot less mathematically than the new price for what I got.

    • Michael Calise

      Not entirely true Matt. The underlying value of the land will be valued essentially the same but the newer home will have less depreciation applied and additionally newer homes tend to have greater square footage and more amenities (more and bigger baths, HVAC systems etc..) Therefore the structure will have a much greater value for a net result of higher taxes. Conversely bigger newer homes are likely to have larger families which impose a greater burden on services as well as education so they tend to be more costly from a budgetary standpoint. All the more reasons for keeping taxes low so that seniors who are in smaller older homes can stay put.

  3. Another good reason why some buyers want only new construction is that they do not want to deal with renovations and/or repairs of major appliances – heating, airconditioning, etc.

    But all the reasons mentioned for buying new construction wear out pretty quickly if the house is on a busy street and you need to say a prayer every time you drive in and out of your driveway, or you are far from the train if you need to commute every day, or far from all the amenities the town has to offer. When buying a house to live in or for an investment, the location is what will maintain its value.

  4. New vs used….a McMansion built in the 80’s or 90’s with a “bargain” price vs new construction has it’s drawbacks. Repairs and replacement of appliances and major systems are a regular occurrence. Costly and inconvenient. But brand new is a luxury not everyone can afford. Just like cars.

  5. Jacques Voris

    I, for one, prefer older homes

  6. Scott Brodie

    Of course, the “flip side” of this discussion is that “used” homes are a relative bargain, and are likely to hold their value better.

  7. Jens Buettner

    I think it’s about time that builders and buyers wake up. Who needs these McMansions with 6000 and + sq ft. anyway. It’s ridiculous, specially when building on existing lots in town, it’s getting completely out of proportion. For an example look at Compo Rd S or Compo Beach Rd how it has changed in the last years. These streets used to be grown streets, with property size, house and garden in proportion. Now you have these gigantic monsters who almost fill the whole lot, leaving little space for a garden and dwarfing the properties to the left and the right.
    Another aspects are taxes, maintenance and energy usage for heating and cooling. Once they are not “new” anymore, they face the same problems as existing houses for repairs etc, except the costs for repairs are higher as well.
    I think all that is very short sighted, the money you spend you can also invest into an existing “old” house and do a great job by adding on or restructure it and update the equipment, plus in most cases these houses have a soul.
    Ever seen a McMansion with a soul?

  8. Homes are not a commodity. Yes, the value of a house can be affected by certain economic factors – but every property is unique, which makes it not a commodity.

  9. It will be interesting to see what happens to the value of these huge homes 20-30 years from now….can you say “White Elephants.” It seems that many younger people are not so enthralled living large and they are looking for smaller and more reasonably priced accommodations. My prediction is the popularity of these large homes will wane over time. Additionally, I alway love to listen to the people that live in these larger homes talk about how environmentally sensitive they are as the 10 AC condensers drone in the background and you can watch the electric meter spin away. Yes, I get that this is Westport and it is “different” from other towns but I still stand by my prediction and Connecticut is a death spiral state with out of control spending and a government that is hell bent on driving economic development racing towards the border. Additionally, Metro-North is only getting worse with no improvement on the horizon. This is the life blood of Fairfield County and will, overtime, significantly impact the value of real estate both new and old.

    • Jens Buettner

      Can’t agree more. I moved here from Europe, they have building regulations, you just can’t simply put an “elephant” into a grown neighborhood.

  10. Mark Demmerle

    One of the next state firecode regulations to come in the near future ( probably next year) will be for all 5000 SF homes and larger to have sprinkler systems. Looks like the Fire Marshall is expecting a lot of ‘hot commodities’ in the way of new homes next year. Better install a sprinkler system if your big house is still in the framing stage or you’ll be listing it as a ‘used car’ before you get the CO.

    Other states (mostly out west) are beginning to look at ‘zero net energy’ home designs and modeling ordinances that promote the design of homes that consume no more energy than they can produce on their own. Great idea in my opinion. No sense even mentioning ‘green’ anymore, if it’s low energy it’s automatically green!

    One regulation is in reaction to excessively large homes while the other is proactively encouraging a more progressive approach to the design of a residence. The state could get involved. It’s interesting that CT would rather use the IRC 2003 code with amendments rather than the latest iteration of the IRC. Our neighboring states use the latest version of the IRC

    The largest emerging demographic today is the 60+ something ‘baby boomer’ ( I guess a ‘nest’ is a decent metaphor for house?) now residing in a 5000 SF ’empty nest’ and wishing to move to a smaller house on a smaller lot within the towns where they currently reside.
    Not easily accomplished in an area where building sites are trading for millions and the competition to build ‘super size’ is fierce.

    If you can’t beat them than go west young man. Haha!

    Some states are introducing codes such as ‘zero net energy’ which would direct the home builder to think about how a house can be designed to consume only the amount of energy that it can produce on its own.

    It is interesting to note how different states introduce regulations in their ordinances to

  11. Elizabeth Thibault

    This seems to be a situation of “don’t hate the player, hate the game.” The builders are responding to the demands of the market. The market is driven by many people moving to the suburbs from NYC, or upgrading from their “starter” homes. These are situations where one might not feel like someone is being a rational actor, but someone obviously values the new upstairs laundry room, 3 car garage, dual fuel/geothermal furnace, radiant floor heating, multi-jet showers, dedicated craft rooms, LEED certifications, etc… more than they desire to keep that extra $1m. Your mileage may vary – greatly, it seems.

    • Nancy Hunter Wilson

      You’d have to be nuts to choose an upstairs laundry room.
      You’d be wise to choose radiant floor heat, though.

      • Elizabeth Thibault

        I was just enumerating all the hot trends we have seen in listings. But to be honest, we loved the upstairs laundry we in our condo when we lived in East Norwalk. We had an overflow system that would prevent flooding, but it wasn’t really ever a risk with regular maintenance of our home and equipment.

        • Nancy Hunter Wilson

          That’s good. I just remember friends who came home to a flooded house!
          Not sure if their home insurance covered it.

          Anyway, to the “McMansion” point: what I don’t understand about building over an entire lot is “where do the children play”?

          • Cat Stevens wondered the same thing.

            • jerrymacdaid

              The third floor or over the garage “bonus room” of course. Are children actually allowed to play outdoors in the yard these days? Sounds like an invitation for a call to Child Protective Services. No “free range” children allowed in Westport.

          • Jamie Walsh

            That’s why you tile, waterproof and put a drain in the upstairs laundry area… It is also easier on older folks who live on the second floor and do not want to risk hauling laundry up and down the stairs.

            • Nancy Hunter Wilson

              Water pipes have broken? Not in the morning! That would make me cry a lot, not laugh a lot! Just sit alone, by yourself, and wait for the Peace train.
              It truly is a wild world!

  12. I don’t need no stinking plastic fantastic hut – I’m taking my preowned house with me when I go. So there.

  13. Bart Shuldman

    Interesting to read the comments about what ‘you’ believe a buyer should want.

    As for Westport, we should be very thankful that real estate is actually selling. Just go to some of the surrounding towns to hear the horrible stories of ‘no buyers’.

    We have lots to offer the new young buyer as they look around this area. First-our schools are rated some of the highest in CT. Thanks go to the many on the Board of Education for continuing to drive fabulous schools.

    Next is Westporte solid financials. Our budget has now been under control the last few years under Jim Marpe’s leadership and out pension plans 85% funded. OPEB needs some more work but Jim inherited a horrible situation and is adding to the OPEB needs. Anyone looking at living in Fairfield County will find Westport to be one of the best choices.

    With the growth of construction in Westport and investment in commercial properties (thank you David), our Grand List is up the most in Fairfield County. Most residents will probably experience LOWER property taxes as the new construction raised those home values.

    We should be thankful we have buyers coming into Westport as job growth and company exiting CT lead the news. GE will leave Fairfield shortly and GE capital has just about been all sold. Many jobs will not stay.

    But we have a solid financial footing (thank you Jim) and great schools. And those milenials who are having multiple children find NYC too expensive and seek the country life.