In the past year the share of sales made up by newly constructed homes has increased from 9.7 percent in June of 2022 to 11.5 percent last month. A quick look at the trendline in Figure 1 might indicate that the sale of new construction is rebounding from a slump during the COVID-19 pandemic and is continuing a gradual upwards trend that occurred before 2021, but it is surprising to see new construction, a fairly expensive product, perform so well in a sluggish housing market. A curiosity like this is usually worth following, but this time let’s explore with an understanding of the wider context. Along the way, we’ll get a better understanding of the scale of the new construction market, discover a surprising market activity and what might be causing it, and consider the change in new construction sales price.

Buyers, sellers, and REALTORS® alike are well aware that home sales have been declining since the onset of increased mortgage interest rates brought on by actions from the Federal Reserve (and yes this is yet another example of how interest rates are impacting our industry, but trust us it’s worth the read). Figure 2 shows that wider context, with a clear drop off in monthly closed sales beginning in the third quarter of last year. Notice, however, that the decline of previously owned homes is much more visually noticeable than any change in new construction. With this larger context, it’s clear that new construction is taking up a larger market share of closed sales because of a more dramatic decrease in demand for previously owned homes.

Proportionally, new construction is simply taking up a larger slice of a smaller pie. But that doesn’t mean that everything in the new construction segment is rosy. A deeper dive into the monthly new home sales, as shown in Figure 3, indicates that new construction has been experiencing a market slowdown in demand since 2021. Albeit, the scale of this decline should not be seen as the same as the drop-off in the larger market. It’s a safe guess to say that closed sales for new construction have been declining for years because first buyers were aiming to purchase the deal of a lifetime on a previously owned home when interest rates were low. Then when interest rates quickly shot up, fewer people were interested in buying any home, much less a new home.

This exploration illuminates another interesting event that has been going on since the start of 2022. While demand for new home has consistently decreased, the supply of new construction listings has increased. Normally supply follows demand, but in this instance, it’s been actively diverging. We can see from labor market reports and city building permits that developers capitalized on the sudden demand for homes by building residential projects to meet this consumer need. However, developers had to deal with unforeseen supply chain disruptions across all major industries connected to their business. In addition to supply chain issues, run-on inflation for the cost of those materials and the labor to build meant that developers were building homes that were more expensive on average. Now, new construction homes have been selling at higher prices than the median sales price ever since we’ve been recording, that’s not what’s most important.  What is important here is how the price of new construction has increased, relative to the sales prices of the overall housing market, but also relative to itself.

We heard so much over the past two years about the rising cost of homes, but Figure 4 clearly shows that newly constructed homes bore the most sensational year-over-year increases in median sales price. Many factors contributed to this, but it’s worth acknowledging that new construction not only was impacted by the inflation of home prices, but the inflation on supply and labor prices. Now that the Federal Reserve’s actions are in full effect, the rate of growth for new construction home prices has returned to mirror that of the general housing market; a declining rate of growth yet still positive.

While the proverbial fire is out on run-away inflation, new home prices are still high in a segment of the market that is usually considered above region-wide median sales price. A final thought to consider is how much the current state of new construction has changed in a longer timeframe. How expensive is new construction today compared to ten years ago? Or even twenty years ago? Figure 5 shows the distribution of closed sales by nominal price for the month of June in 2003, 2013, and 2023. All three time periods have been adjusted for inflation to represent 2023 dollars. You can see that two decades ago newly constructed homes were built at a price point similar to today, with a median sales price of around $480,000 and the lion’s share of the market above $250,000 in 2023 terms. Then in June 2013, there was a wider distribution of sales prices with a median sales price of newly built homes at $360,000. Last month saw newly constructed closed sales almost exclusively above $350,000. This chart demonstrates that while the new homes are no stranger to the upper market, this year’s hyper-focus on pre-luxury price points is a noticeable shift away from building more affordably priced homes. There are additional factors to consider such as cities being more fully developed in more recent year, municipal regulation limiting residential density, the increased preference for larger homes, and higher quality materials for everything from safety to aesthetics. This remains a worthwhile thought simply to acknowledge the reality that the Twin Cities isn’t building enough. When homes aren’t being built at varying price points, that leaves newly constructed homes only a purchasing option for the elite few who have the financial resources to keep up with luxury home prices. Any new construction is better than no new construction, but new construction at affordable, market rate, and beyond is preferable to ensure a balanced housing market.