New Home Sales Reach 12-Month Low

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New home sales are on the decline. Here's what it means for buyers.

There's been a very limited number of existing homes available for purchase in today's real estate market, so some buyers have turned to newly built homes as a more viable, albeit potentially expensive, alternative. But new construction sales haven't exactly been taking off.

New home sales -- those that apply to newly constructed homes -- dropped in May, reaching a 12-month low. Specifically, that decline was measured at 5.9% compared to April's figures, according to data from The U.S. Census Bureau and the Department of Housing and Urban Development.

One thing that's interesting is that new home sales fell in May despite the inventory of available homes growing from 315,000 to 330,000 nationwide. But the reason for that decline could very much boil down to cost.

It's getting harder to buy a newly built home

During the first quarter of 2021, newly built homes made up 26% of total home sales. But still, many buyers today may have no choice but to pass on new construction due to one major factor: cost.

Since last year, there's been a massive shortage of lumber and other commonly used building supplies, and that's causing a demand crunch. As such, prices are being driven upward, to the point where buyers today can expect to spend about $36,000 more on the typical new construction, on average.

Can you afford a newly built home?

When you buy an existing home, you can often get away with putting down less than 20% at closing (though doing so will result in private mortgage insurance if you take out a conventional home loan). But often, mortgage lenders require a 20% down payment for new construction, which means you'll need to come up with more money up front. Add that to the fact that newly built homes tend to cost more than existing ones -- and are costing more these days -- and you may find that buying one isn't financially feasible in the near term.

That said, one benefit of buying new construction is that your maintenance and repair costs may be lower for at least the first few years you're in your home. That's because newly constructed homes generally come with a builder warranty, which covers you for workmanship defects. That warranty will last a minimum of one year, though you may be able to find a builder who will throw in a longer one.

Plus, home appliances generally come with longer warranties of their own. So if you buy an existing home, you may have to replace your water heater within a year, but if you buy new construction, you may be protected against that expense for a good five years.

Ultimately, you'll need to crunch some numbers to see if new construction fits into your budget. Clearly, a lot of buyers are staying away from new builds due to the cost involved. But if you can swing a newly built home, you may find that it's worth buying one, especially if you can't find an existing home for sale that suits your taste and requirements.

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