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How Do New Construction Home Inventories & Sales Impact Pricing?

February 15, 2024
Filed Under:
  • Finding the Right Home
  • Homebuying
  • lifestyle community
  • Master Planned Communities
  • New Homes
  • real estate market

The housing market is complex, with countless factors influencing prices. Two key elements that influence the market are new construction home sales and new and existing home inventory levels. Their relationship is symbiotic, yet intricate, and understanding their impact on pricing is key for both buyers and sellers.

Imagine a seesaw – on one end sits demand, fueled by factors like population growth and economic strength, among others. On the other, we have supply, represented by existing homes and, critically, new construction home inventory. Below we explore the factors that affect prices of new construction and existing homes and break down the relationship between new and existing home inventory and pricing. 

How Inventory Affects Prices

When the supply of homes available to buy exceeds the number of buyers looking to buy a home, this is known as a buyer’s market. Sellers of existing homes and builders selling new construction homes must compete for available buyers, which drives down prices.  

When available home inventory is low, it creates a seller’s market. Buyers have fewer options, driving up competition for available homes. This increased demand pushes prices upward, as sellers can command higher premiums for their limited supply. Think of it like attending an auction with only a few items up for grabs – the bidding wars naturally escalate.

New Home Construction Adds to Available Home Inventory

However, the story doesn’t end there. Higher prices and robust sales motivate builders to increase construction. This adds more new homes to the market, gradually tipping the seesaw towards the supply side. As inventory rises, buyer competition lessens, potentially leading to price stabilization or even slight moderation.

However, construction timelines are long, so even a surge in building activity takes months to translate into increased inventory. Furthermore, new construction pricing comes with its own set of dynamics. Unlike existing homes, builders have more flexibility in adjusting prices based on market conditions. They can offer incentives like free upgrades or mortgage rate buy-downs to entice buyers even in a softening market. Additionally, construction costs like materials and labor play a significant role in determining new home prices, adding another layer of complexity.

It’s important to remember that the housing market isn’t monolithic. Local factors like job markets, zoning regulations, and land availability can significantly impact home pricing in specific regions. For example, the Dallas-Fort Worth market can be a more builder-friendly construction market due to the region’s relative ease of permitting and more limited regulatory environment. For these reasons, a national trend of low inventory might not translate to the cities and neighborhoods in the DFW area.

External Factors Affecting Housing Supply & Demand

Beyond just supply and demand, there are many other factors that affect home prices and sales. External factors like rising interest rates, political instability, national/international crises, the economic forecast, inflation, and other factors also greatly impact demand, further complicating the equation. 

Recently, an international crisis, the COVID-19 pandemic, had a dramatic effect on the U.S. housing market.  Its impact and accompanying economic disruption are still being felt.

COVID-19’s Impact on Home Inventory & Pricing

Beginning in 2020, the COVID-19 pandemic upended the housing market. Initially, demand dipped slightly due to economic uncertainty. However, a surprising trend emerged: soaring demand for homes, particularly those that accommodated working from home and offered outdoor living spaces and/or easy access to outdoor recreation areas. Remote work opportunities meant you could live anywhere, opening up relocation options that would not have previously been on the table. Low interest rates further fueled demand, creating a seller’s market with rapidly rising prices.

Home builders experienced their own set of challenges during the pandemic. Supply chain disruptions led to material shortages and price hikes. Labor shortages further hampered construction timelines, driving home inventories even lower. Higher materials prices and low inventories put upward pressure on home prices as well.

The Federal Reserve: Addressing Inflation & Recession Fears

COVID-19 affected more than just housing prices. Everything became more expensive and consumers began to feel the pinch of inflation. To combat it, the Fed embarked on a series of interest rate hikes in 2023 with the goal of slowing spending, cooling the economy, and curbing inflation, without triggering a recession. 

Higher interest rates directly impact the housing market by making mortgages more expensive. Higher rates typically reduce demand for homes, leading to price stabilization or even modest home price decreases.

The DFW Housing Market Explosion

The DFW area doesn’t fit the mold when it comes to typical housing markets. Dallas-Fort Worth is one of the fastest growing metro areas in the nation, adding more people than any other metro between 2021 and 2022. A strong economy, warm climate, and an excellent job market are factors that have driven people and corporations to relocate to the area in droves. More than 260 companies have expanded operations or relocated to DFW since 2020. One study predicts that Dallas-Fort Worth could be the largest metro area in the country by the end of the century.

DFW’s explosive population growth has spawned tremendous demand for homes, fueling a boom in new construction, particularly single-family homes in suburban areas. New home communities like Harvest by Hillwood in Argyle and Northlake, Texas are being created to offer buyers an opportunity to buy modern, energy efficient homes in up-and-coming neighborhoods. 

Even with many new home communities springing up around the region, the market tightened significantly in recent years due to low inventory and high demand, mirroring the national trend. Rising interest rates in 2023 slowed demand somewhat, however inventory of existing homes shrunk to a greater degree. Homeowners with low-interest rate mortgages were reluctant to sell when their next home would come with a much higher rate. Housing remained scarce as new residents continued to relocate to the area. New home builders with available inventory and home sites often had the only reasonably priced options for home shoppers to consider.

Navigating the Housing Market for 2024 and Beyond

So, what does this intricate dance between new construction and pricing mean for homebuyers?

Sellers should be aware of how new construction activity in your area might impact the demand for your existing home. If inventory is rising, consider strategic pricing and marketing to stand out.

Homebuyers should stay informed about local inventory levels and construction trends. Understand that new construction prices might be less flexible than existing homes, but incentives can offer opportunities. New construction homes like those found at Harvest may offer a greater long-term value proposition versus an existing home.

Be sure to consider factors like community amenities, access to schools, and personal preferences when making your decision. New home communities like Harvest are part of top-rated school districts like Northwest ISD and Argyle ISD.  And they include amazing amenities like fitness centers, resort-style pools, splash pads, dog parks, event venues, sports courts, outdoor living spaces, and more. Some neighborhoods also include lifestyle programs. Harvest, for example, has an incredible, award-winning lifestyle program that offers more than 300 activities, clubs, events, and classes each year for neighbors to enjoy.

While pricing is a crucial factor, remember that buying or selling a home is more than just a financial transaction. It’s a decision to become part of a community.

Explore Available Homes at Harvest by Hillwood

We hope this guide has shed some light on the interplay between home supply, demand, inventory and pricing, and demonstrated the important part new construction homes play in the mix. 

If you’re in the market for a new home, Harvest by Hillwood has new construction homes for sale that are under construction and almost move-in ready. There are many designs to choose from, and many of our builders are offering incentives. It’s a great time to buy! Browse your new home options online or come take a look at our builder’s models.

 Find your new home at Harvest and start the exciting journey of building your dream home today.

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