Understanding the Difference between Pre-Owned and New Construction Pricing

The vast majority of realtors in our local market sell pre-owned or resale homes. Especially, in Alaska, where new home construction remains at record lows, realtors develop an expertise in a certain price point or geographic location for resale homes. They look for comparable sales within the last six months and use statistics provided by MLS to determine asking prices. For example, the current average price of an MLS-listed home is $374,568. It sells within approximately 2% of its original list price and within 1% of an adjusted list price. That’s a little more negotiating room than a year ago. but it remains a very carefully calibrated market. If a listed home hasn’t sold within the average time frame of its price point, these statistics would indicate a 1% price reduction and depending upon the time of year (we are now entering the slowest selling season) perhaps 2% or more, depending upon the need for sale and the condition of the home.

However, what is applicable in pricing the resale home is not applicable in new construction. Builders work on profit margins that are required by their commercial lenders who provide them with lines of credit or individual loans for speculative or presale homes. Unlike the pre-owned homes discussed above whose sellers frequently have ‘soft’ equity due to appreciation in the market, builders are required to produce a profit if they want to stay in business. There is very little room for negotiation, not even 1 or 2%. Maybe a buyer will get an extra window, knobs and pulls on the kitchen cabinets or bronze hardware rather than brushed nickel, but by and large, the price set by the builders is the one they have to maintain to stay in business. Homebuilding has a lot of hidden costs. One builder recently confided in me that his gas bill for the prior year was $84,000. That’s the drive-around kind of gas for his crews, not the Enstar heating bill that heats the home while it is under construction. The national average for a builder’s profit hovers around 6%. When the builder goes to his lender to ask for a loan to build a home, speculative or presold, he has to present a budget demonstrating that he is selling the home for a reasonable profit. At the end of the year, he has to produce a financial statement maintaining that reasonable profit margin. If he can’t meet the local and national standard for profitability, his loan fees and interest will increase, putting him into a higher risk category of lending. Every builder has a bad year now and then, but a consistent poor showing of profitability and he is out of business.

Homebuilding is rebounding in the Lower 48 which means inflation for materials in Alaska. The cost of a 2 x 6 today, delivered onsite, is not the cost it was in March. Typically, subcontractors raise their prices in June; this year was no exception. A 4% increase across the board for the identical home plan in the same subdivision is the builder simply passing on his costs to the consumer, trying to maintain his margin of profitability, not gouging the public. Like most things, timing is everything and he who hesitates will undoubtedly pay a higher price. There is a real difference between the resale market and new construction. Knobs and pulls, a wine rack, an extra window, an exterior wainscot of shakes doesn’t seem like a lot to ask when you are paying a half a million dollars for a new home, but in some ways, it is no different than when you’re buying groceries or that tank of gas. You pay the price that gets rung up on the register.