Buyers' Corner: 1+1=3 - Why Buy New Construction?
In the last two years we have been advising our buyer clients who are concerned about "getting a good deal" to give consideration to buying a newly built home. Not only they would be getting a brand new home, with all the warranties and upgrades they select to their liking, buyers could be accessing a great opportunity to get some "free equity" in the short term. Let me explain why:
Generally speaking, new homes should be more expensive than pre-owned homes. Although homes do not depreciate as fast as cars or other consumer goods, certain elements of the home (like the roof and the air conditioning system) have a finite life. If you buy a 10-year old home, in addition to the day-to-day maintenance that your home requires, it is wise to expect to have to replace the roof in the next ten years, and the air conditioning system in the next five. You may also have to re-paint the home and repair any rotten wood that may have developed with time. By buying new you get the benefit of enjoying the full life expectancy of all the systems, and having builder and manufacturer warranties to take care of any potential issues.
a) Builders have been able to buy cheaper land and re-negotiate contracts with sub-contractors, so their prices have been competing very effectively with pre-owned homes; and
b) Our "crystal ball" has been telling us that construction costs may experience some serious inflation in the next 18 months, for two main reasons:
i) Building Supplies - building activity is booming all over the country - thus increasing demand for building supplies, yet many manufacturers reduced their production capacity during the recession. Increased demand + limited supply = higher prices.
ii) Labor - in addition to a diminishing labor pool as the economy gathers momentum, South Carolina implemented a very tough anti-illegal immigrant law that came into effect January 1st last year. As a result, many construction workers who did not have proper documentation left the state. Read a recent article about this issue on CNN Money. As a result, many construction companies are experiencing a shortage of candidates and are having to raise their hourly rates to attract workers to be able to operate and grow their business.
For these reasons, we strongly believe that the cost of building a new home will increase noticeably in the next two years, and buyers who purchase now will enjoy a "free equity ride" as builders are forced to increase their base prices.
Real Estate Market Factors
The real estate market in the Charleston, SC area (and especially in Mount Pleasant) has experienced a strong recovery, in some instances has become under-supplied, so prices are rising and many areas have become "seller's markets". In Mount Pleasant and Daniel Island, any listing under $500,000 that shows well and is well priced is likely to receive multiple offers within days of hitting the market.
So, buyers of new construction homes will get a "double whammy" appreciation boost in the next few years! Not only their homes will appreciate because of the market improvement in prices, they will also get an equity boost because of construction costs going up, which will compound with the market factors, combined with record-low interest rates!