By Phil West, WCI Contributor
If you’re asking the “Are new construction homes worth it?” question, know that the answer is almost always going to be “that depends.” There are a lot of factors to consider: where you’re buying, what the market’s like, what you’re specifically buying, what you’re buying it for, and how long you plan to hold on to it.
While real estate is widely considered to be a good investment overall, it’s not a fail-safe, and it’s certainly not right for you at all stages of your life. For instance, purchasing a new construction home when you’re in your 30s might make more sense than it does in your 60s.
As The White Coat Investor has pointed out when considering real estate throughout the decades, “If you’re making new allocations to real estate investments in your 60s and beyond, think carefully about how you’re going to get out of them.” It’s not always a seller’s market, and prices can indeed fluctuate depending on demand.
And yet, there’s enough to new construction homes as an investment strategy to explore it a bit more.
Is New Construction a Good Investment?
The advantage to new construction homes is the new part of it. Though this certainly isn’t always the case, it’s likely the newness of the home (plus its warranty) guarantees a repair-free experience initially. When you’re the first owner, you’re aware of anything that needs attention along the way, and you can also add things on to increase the home's value.
When you’re not the first owner, you’re reliant on disclosures from the sellers and home inspections to uncover what might be wrong. From there, you can determine whether the house is worth the risk and the additional repairs or renovations that might be necessary. But with a new home, there’s a lot less to worry about that.
More information here:
9 Tips for Hiring a Contractor to Build Your Dream House
Are New Construction Homes Worth More?
According to Census Bureau data from July 2022, via Bankrate, the median price for a new construction home is close to $425,000, and the average sales price is even higher, approaching $500,000.
The actual price is going to depend on the market and the neighborhood in which you're buying. That's why the location, including the quality of schools and accessibility to major highways or public transportation, is so vital. But newness will appeal to many buyers, and those perceptions definitely affect the value of those homes when they first go on sale. The longer a house sits on the market unsold, though, the more questions will arise about its real value.
In some places, the combination of real estate prices in a market and the premium placed on new home construction can spike the asking prices beyond many buyers’ budgets or, at the very least, comfort levels.
We wrote an article back in 2019 about how tough it is for doctors to make it in California. The No. 1 reason for that was the high cost of living, and the single biggest factor in that is home prices. As Dr. Jim Dahle wrote, “In case it isn't abundantly clear, the average California orthopedist has to stretch to buy the AVERAGE house in the Bay Area and that house is completely unaffordable for the average California family practitioner.”
That makes it hard to build wealth.
Do New Construction Homes Have Good Resale Value?
There’s no one easy answer to this question. As you’re considering a new construction home, consider the neighborhood, the schools, the style of the home, and the growth of the region. What you’re trying to figure out in all that is whether people will still want to live there five or 10 years from now.
If you live in a new construction home for at least two of the five years before selling it, you won't have to pay capital gains taxes when you sell it. GineersNow notes that while new homes tend to be overpriced compared to the homes around them, “after a few years, all the others will catch up, and its price will be the norm. You are future-proofed.”
More information here:
How Expensive of a House Can I Afford?
What Is the Difference Between New Construction and Ready-to-Build?
The main difference between new home construction and a ready-to-build home is an actual house vs. a potential house. New home construction generally refers to a house that is built and ready for move-in as soon as the sale is finalized. A ready-to-build home, however, initially consists of a choice of house plans and, if it’s part of a planned neighborhood, a choice of lots.
While it can take longer to get into a ready-to-build home because of the construction time involved, it’s more customizable—it’s being built to your specifications, so you get to green-light everything that goes into the house.
Do New Builds Depreciate in Value?
This is another complicated question. If you move into a new build home and you put it on the market just a few months later, you probably won’t be able to command the same price as a comparable new build home in the same neighborhood. But in many places, new build homes retain and even increase in value over time, though it’s entirely contingent on what’s going on around them.
Should I Buy a New Construction Home?
Ultimately, buying a new-construction home is a personal, individual, and complex choice. If you’re planning to be in a home for a good number of years, you’re not concerned about the relative illiquidity of real estate, and you consider it important to have a repair-free home—knowing, of course, that life is unpredictable—then a new home might be right for you.
More information here:
How to Buy a House the Right Way
Pros and Cons of New Construction Homes
The main pros of new construction homes are:
- The newness
- The warranty
- The potential for an appreciating investment
The main cons of new construction homes are:
- The cost relative to existing homes
- The need to stay in one for at least a few years to make it “worthwhile”
- The potential for depreciation (or not being as wealth-building as other types of investments)
And, of course, the pros and cons change a bit if you’re buying this home to live in vs. if you’re buying it as a rental property or purely as an investment. While some consider real estate to be a more stable place to invest money in than some other avenues, it’s actually one of the most YMMV (your mileage may vary) avenues around.
It’s definitely worth a lot of study of the market you’re buying into and a good deal of reflection before you turn a “for sale” sign into a “sold” sign.
WCI’s No Hype Real Estate Investing is the best real estate course on the planet and the best way to get started in this exciting (and profitable) asset class. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 25 hours of content, and it gives potential investors the foundation they need to learn about all the different methods of real estate investing. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course!
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.
Great article! Investing in a new construction home can be a smart decision for many reasons. Not only can you customize the home to your specific preferences and needs, but new construction homes often come with modern features and amenities that can increase the home’s resale value over time.