Housing Market 2024: 4 Reasons To Avoid Buying New Construction Despite Housing Shortage

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One of the main reasons the housing market has been very difficult lately is low inventory. Indeed, the “lock-in” effect — homeowners not wanting to let go of the houses they bought when rates were much lower — is in full force and one of the main drivers of this phenomenon.

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In turn, another option for buyers is turning to new construction. Just in November, private housing starts (the number of houses that started construction in a month) surged 14.8%, a 9.3% annual increase on the year. Meanwhile, single-family starts rose 18% in November — a whopping 42.4% increase from a year earlier, according to the Census Bureau.

“The strength of single-family homebuilding was one of the economy’s biggest upside surprises in 2023,” said Bill Adams, Chief Economist for Comerica Bank. “As mortgage rates surged, homeowners who might have moved or downsized stayed put instead, hanging onto low mortgage payments locked in when rates were low.

Adams added that most Americans can’t afford the typical house, according to the National Association of Realtors’ Affordability Index — but the minority who can face slim pickings in the existing home market, and so are buying more new construction than in a typical year and sustaining single-family homebuilding.

Yet, while there are more choices when it comes to newly built houses, some experts argue that it’s not always a financially wise move.

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Less Flexibility to Negotiate.

Claudia Cobreiro, a real estate, family and business law attorney and founder at Cobreiro Law, argued that although pre-construction projects can be appealing to homebuyers, especially in a market with dwindling supply and increasing demand, it’s important for buyers to know some additional risks are associated with these transactions.

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“Pre-construction projects typically allow less ability to negotiate the terms of the contract, more uncertainty as to the closing and move-in timelines, and more risks associated with the buyers’ deposit and financing,” she said.

Delays, Lots of Delays

According to Cobreiro many of these contracts establish a projected delivery date in one clause, while also including a clause that protects the developer for a considerable amount of time beyond the projected delivery date in case of delays.

“It is also not unusual for buyers to lose their deposit on a pre-construction home for being unable to secure financing (loan approval) when it comes time to close on the property, regardless of whether they qualified when signing the contract,” she said.

Clare Trapasso, Realtor.com executive news editor, echoed the sentiment, saying that typically it takes a little over six months for a new home to be completed–if there are no delays.

“Those delays can be problematic for buyers, especially those who are on tight timelines and need to be out of their current homes by a certain date,” she said. “They can also make buying more expensive if mortgages climb during that time. When mortgage rates were rapidly rising in 2022 and 2023, some buyers couldn’t afford the homes they had wanted at the higher rates.”

Yet, Trapasso also noted that the good news for buyers is there aren’t as many delays as there were during the pandemic when there were supply chain issues.

“Mortgage rates have also been coming down a little since mid-December, which should provide buyers with some relief,” she said.

Higher Property Taxes

According to Realtor.com, new construction communities sometimes have higher taxes than older ones.

“This is because these communities are being built from scratch and need infrastructure, such as roads, infrastructure, water, etc.,” said Trapasso.

In turn, she said, this costs money, which homeowners may cover through higher property taxes.

“In addition, sometimes the homes aren’t assessed correctly initially, which can lead to a larger bill later on,” added Trapasso.

Higher Costs

According to Trapasso, new construction often costs more than existing homes. For instance, she noted that in November, the median sale price of a new build was $434,700, nearly $50,000 more than the median sale price of an existing home at $387,600.

“Now, builders have been trying to put up smaller, more affordable homes since mortgage rates shot up,” she said, adding that many are also able to offer financing that can allow them to buy down mortgage rates for the first few years of a buyer’s loan or even for the full term of a 30-year, fixed-rate loan.

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