In a shift in the housing market dynamics, new construction homes in the Los Angeles area, and across the nation, are now more cost-effective on a square footage basis than their existing counterparts. A report from Zillow has highlighted that in May, the median sale price for newly built residences in the L.A. metro region was $1.15 million, contrasting with $970,000 for existing homes. However, despite the higher overall price tag, new homes came in at $52 less per square foot.
Examining the broader market, it's not just Los Angeles seeing this trend. The Zillow report, released earlier today, found that on a national scale, new homes were sold at a $3.50 per square foot discount compared to existing homes. This represents the most significant such discount in the past six years. Albeit, the scenario is not uniform across all locales; for instance, in San Jose, California, newly constructed homes are transacted at a hefty premium of $216 more per square foot than existing homes, and in San Francisco, the surplus is $137.
The landscape of real estate is witnessing a tangible shift with newer homes offering advantages beyond mere affordability. Buyers are reportedly drawn to these properties as they do not require immediate repairs or updates, making them 'move-in ready'. According to a KTLA report, this move-ready condition is a primary factor for many when deciding on a new build. Influenced by the pandemic's impact on housing markets, builders have recalibrated their strategies by producing smaller homes on smaller lots, aiming to attract affordability-focused consumers.
Shrinking lot sizes and square footage reductions have also played a role in the changing price dynamics. In May 2028, the size disparity between new and existing homes sold was notable, with new homes boasting an advantage of nearly 500 square feet. Yet, by May 2024, as per a Zillow analysis, this gap had narrowed down to just 335 square feet. This considerable reduction in size for new builds is indicative of efforts by developers to manage rising land costs and still provide affordable housing options amid a persistent national housing shortage.
Buyers considering new homes are weighing factors like affordability and modern amenities, such as energy efficiency and air-conditioning, with nearly 89% rating a home within their budget as very important, according to Zillow’s New Construction Consumer Housing Trends Report. Furthermore, data shows that approximately 29% of new homes received a price cut in June, and a significant portion of builders (61%) offered incentives to entice buyers, ranging from mortgage rate buydowns to covering closing costs—adding to the overall appeal of these properties compared to existing homes.
The shift towards more affordable new homes is happening amid a backdrop of a nationwide housing deficit which Zillow research placed at 4.5 million homes in 2022. While home construction has ramped up during the pandemic, it falls short in addressing years of underbuilding. The demand for new housing is likely to persist, as the market still grapples with the fact that the number of existing homes for sale remains 33% below pre-pandemic levels on a national scale.
