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Why Purchasing New Construction Can Be a Smart Move for First-Time Homebuyers

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Many first-time homebuyers may feel they are better off choosing a second home over a new home – in other words, buying an existing property rather than an expensive new build.

While brand new homes tend to be more expensive up front, these properties can actually be a good or even a great deal for first-time buyers.

“It’s true that new construction homes sell for an average of 10 to 15 percent more than resale homes, but that doesn’t mean they’re less expensive,” says Bob Seeman, vice president of new home sales for Realtor.com.” Simply put, the total cost of homeownership is more than the monthly mortgage payment.”

Here’s why first-time homebuyers shouldn’t rule out new construction and how these opportunities are a better value than many may think.

Low inventory means first-time buyers should explore all options

In a housing market that is still dealing with extremely limited inventory, the reality is that first-time homebuyers cannot afford to ignore this option.

According to the National Association of Realtors®, the inventory of existing homes on the market was at a record low of 910,000 units in December 2022. That’s down 18 percent from a year ago and marks the 31st consecutive month of declining homes available for sale.

“The housing shortage is going to get worse next year – we simply don’t have enough supply,” said John Hunter, chief analyst at MarketNsight.

For example, Hunter said that in order to return to “normal” conditions and meet demand, Atlanta alone would need to add 66,000 homes to the market over the next 12 months.

Compounding the problem is that homeowners who might normally sell their homes aren’t doing so because they’re reluctant to buy new homes – and get new mortgages – with interest rates so high.

Translation. Unless you want to wait a long time to buy your first home, you should consider a new construction home because there aren’t enough homes to meet the current demand.

Builders can help first-time buyers with better financing

Let’s face it, price matters. This is true whether you are buying your first home or your third luxury vacation property. The difference in buying new construction, however, is that you may be able to save money through builder incentives.

These promotions – designed to entice buyers to purchase a particular development – often come in the form of financing assistance, which is what makes it possible for first-time buyers to purchase a new construction home.

“What many first-time homebuyers need most,” Seeman says, “is a cash closing and a monthly payment they can afford.” Because many builders can provide financing through their company’s mortgage division or through an affiliate of a lender, they have programs that can help reduce the amount of cash buyers need to complete their home purchase.”

Reducing the initial cash outlay can make a big difference for first-time homebuyers. Many builders are also now offering lower mortgage rates through their lenders to attract first-time homebuyers who would otherwise be squeezed out of the market.

“We’re seeing builders get creative with their financing and now offer rates as low as 4.99% to 5.99%, which is lower than what you see on existing homes,” said Alex Toth, director of home builder partnerships at Opendoor.

As mortgage rates spiked to more than 7 percent in October, the first time in 20 years that a 30-year fixed-rate loan has been available, it can really determine whether a first-time homebuyer qualifies for a home.

Another benefit of working with a builder’s lender is that the lender is often well versed in FHA and VA loan options. These low or no down payment loans can also be a huge benefit to first time home buyers trying to get a mortgage if they qualify.

New-construction homes can save you money on utilities

The total cost of owning a home includes more than just the down payment and mortgage, but many first-time homebuyers forget about that part of the cost.

“Even if a new home is 10 percent more expensive than a resale home,” Seeman said, “the new home is built to the latest building codes, which mandate stricter insulation and energy standards. This means that heating and cooling costs for new homes may be reduced.

These efficiencies should help offset the slightly higher monthly mortgage payments,” Seeman added.

Bill Samuel, owner of Blue Ladder Development, agrees.

“In most cases, a new construction home will be significantly more energy efficient than an older home because it is built to a higher energy building code standard, so your utility bills will likely be lower than those of an older home of similar size,” Samuel explained.

However, Janice Glessner, online sales and marketing manager for S&A Residential, advises first-time homebuyers to look for a builder who can provide proof of a home’s energy efficiency through a home energy rating score.

“This can translate into savings of hundreds, if not thousands, of dollars per year, depending on where and how you live,” Glessner said.

New-construction homes often require fewer repairs—and come with warranties

Another way first-time buyers may save money by buying a new construction home is that it is much less expensive to maintain over the years because all the parts of the house are new.

Older homes have hidden costs,” Glessner says.” For example, it can cost thousands of dollars to replace an HVAC system in an older home.

But if something does go wrong with your new home, not only may there be some manufacturer’s warranties, but many builders include additional home warranties, which can save first-time buyers from unforeseen costs.

“Builder’s warranties often have multiple components,” Seeman explains.” For example, a warranty might include major appliances and systems – e.g., plumbing, electrical – for two years, and structural defects for 10 years.”

Customization is cheaper than renovation

“Cost aside, many first-time homebuyers are millennials who are used to and expect customization in almost everything they do, and new construction homes offer just that,” Toth said.” From integrated smart home systems and technology to customizable finishes, today’s builders are giving first-time homebuyers a plethora of options.”

Numerous experts also agree that one of the biggest benefits of buying a newly constructed home is the possibility of customizing the home to meet specific tastes. It’s also a financially smart move, as renovating a resale home can cost more than a newly built home.

“Often, builders can get favorable pricing from their subcontractors and suppliers,” Samuel says.” As a result, it is often more economical for them to make upgrades during construction than to buy the property as-is and hire a retail contractor to make the needed improvements.

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