New Home or Existing Home ? Which is the Better Deal?

Now that home values are no longer on a steady upward path, the choice of home you buy has greater consequences than ever. In the recent past, a purchase mistake could usually be covered by rising prices. All you had to do was wait a few years and the moment would come when you could sell the mistake at a higher price than you paid, and move on to something else. But buying decisions today look more permanent than they did a few years ago. A home purchased today might stay with us for 10 or 15 years before selling would even begin to make sense. Against that backdrop, do you go with a brand new home or existing home?

The argument for NEW homes

The emotional appeal of being the original owner. For many people, a house isn?t truly theirs unless they?re the original owner. This has a strong appeal, but more so if the stay in the home will be measured in decades rather than years. The opportunity?to be the original owner and customize the home to fit your own particular tastes always has great appeal.??Even if you customize an existing home, the ?ghosts? of previous owners will always be present somewhere in the home.

New Home or Existing Home ? Which is the Better Deal?
New Home or Existing Home ? Which is the Better Deal?

Fewer repairs needed in the first few years. The draw of a low maintenance home can be especially important for first time buyers since the first few years of owning are usually the toughest, financially speaking. Since everything in the home is brand new, replacement and even repair of the components can be years into the future. That can buy valuable time to accumulate a cash cushion for the future when repair and replacement will become part of the routine of homeownership.

Having it your way. An existing home will always be a compromise to some degree. A new home is an opportunity to customize the home to your preferences. It isn?t just the choice of room colors or furniture placement either. With a new home, you can often have a decision in fixed features such as the floor plan, construction materials and even the placement of the house on the property.

The latest equipment and upgrades. Technology changes and improves (usually) over time, and new homes will have the latest and the best. New homes usually incorporate the latest advances in construction materials, wiring, heating, air conditioning, appliances, windows and insulation. These upgrades can translate into real savings on utility bills. You could gradually upgrade the components of an existing home, but that will require substantial money, and you may find that the latest equipment won?t work in a certain property for unforeseen reasons.

The argument for EXISTING homes

With all of the advantages to buying a new home, why even consider buying an existing one? A big one is cost. In similar markets, new homes typically cost more than existing ones, and depending on where you live, the difference can be substantial.

No new home premium. In most markets, new homes are more expensive simply because they?re new. Call it the ?new home premium?. It?s the same reason why people will pay more for a new car than a used one, or anything else that?s brand new. The problem is, once you?re in the home for a year or two, it?s not new anymore!

Some new home buyers find themselves in a quandary if they purchased a new home in a large subdivision where new construction is ongoing. If they have to sell their home while new units are still being offered for sale by the builder, they?ll have that to compete with. Except that the home they?re selling – which is no longer new – is now an existing unit in competition with new ones. Guess which homes usually win that contest?

Options and upgrades. Anything added to a new home will cost more. For example, existing homes typically have curtains, shades, garage door openers, decks, fencing, patios, landscaping, light fixtures, etc. Any of these that you add to a new home will be considered an ?option??which is to say you?ll pay extra for it.

With new homes you?ll pay the retail price for any upgrades, which is the cost to add anything to the basic house. With existing homes, upgrades are part of the total package and you?re effectively paying a depreciated price for them since they aren?t new.

Unidentified problems. People like to buy new homes because ?new? implies ?problem free?; in truth, there?s no such thing. Because a home is new, problems simply haven?t had time to develop!

With an existing home, most problems can be easily identified by a qualified home inspector. Once they are, you can either require that the seller remedy the problem or negotiate a lower sale price. With a new home, you won?t know about any problems until you?re in the home a couple of years, and by then you?ll be the one stuck paying for the remedy. Builders have an uncanny way of disappearing once the last house on the street is sold.

Builders offer warranties with their homes – sellers of existing homes can do the same – but those policies don?t typically cover basement flooding or rapid settling with their attendant problems. And they never cover poor construction. All are potential unidentified problems with new construction.

An existing neighborhood ?personality? is known. Existing neighborhoods develop something like a personality. We hear terms like ?kid friendly?, ?close knit?, ?active? and ?peaceful? used to describe existing neighborhoods. If those descriptions are of a positive nature, they tend to enhance the desirability and resale value of the homes that are in it.

This is always an unknown if you?re buying in a brand new subdivision. Since both the homes and the people in the neighborhood are unknowns, future trends can be unpredictable. You could move into a new subdivision with your kids and find out a year later that most of the people living there are singles or empty nesters. There?s no way you could know that at the time of purchase. Latent construction problems or a high concentration of renters can make a neighborhood less desirable, and neither can be known at the outset.

Which home do you think is the better buy, new or existing? Do you have any stories you can relate from your experience with either?

( Photo by jollyUK )

16 Responses to New Home or Existing Home ? Which is the Better Deal?

  1. Kevin,

    Future energy costs, as you implied, have to enter the picture at some point and many of the McMansions built during the boom were not built with this consideration in mind.

    That said, if the housing market was to take another 25-30 percent hit, a homebuyer would then be tempted to consider if the more expensive option of building something new, even if it was more energy efficient, outweighed the savings of buying an existing home that sold for $300,000, during the boom, which could easily be selling at a 60% discount in the not-so-distant future. Homes in the Phoenix and Las Vegas markets only have about 10%, or less, to go in reaching that figure. The difference between $300,000 and $120,000 would go a long way in off-setting the lack of energy efficiency in these homes.

    There is probably no one-size-fits-all answer to this question. More and more of those in the fickle work world see owning a home as more of a ball-and-chain than a valuable asset. Mobility is increasingly becoming the answer to income security. Homeownership, in many cases, serves an impediment to quick decision making when narrow windows of opportunity present themselves in a contracting economy where companies are continually downsizing and reorganizing.

  2. Steven & Debra – Personally, I think that right now, the pendullum is swinging in favor of existing, if only because there’s so much inventory in most markets and sellers have to compete with each other to attract what few buyers there are.

    Also, I’m with you on the ball and chain issue. I’ve written about the mobility factor in the past. Not everyone should own a home right now, and it mostly depends on your career. If you have a business that isn’t dependent on the local economy, or if your career is stable–even if your job isn’t–and there are plentiful replacement jobs where you live, owning makes sense. But if you’re hanging on to a one-of-a-kind job that you probably can’t replace at anything like a comparable salary, you might be better off renting.

    Housing is, after all, a very long term proposition. If you’re career or income are on the shaky side, a house could be an albatross.

  3. We hear what you are saying regarding the pendullum favoring existing homes over new.

    The emotion of greed will incline one to wait for housing to fall further while the emotion of fear will incline one to purchase NOW for fear the opportunity of purchasing the ideal existing home might evaporate.

    We certainly see the pendulum reversing direction in favor of an existing home purchase, but we would be inclined to wait for the pendulum to get at least two-thirds of the way through its arc before making such a decision. The position two-thirds of the way through the arc is strictly imaginary because no one can really predict the point where the pendulum will hit its apex, but the baby boomer overhang in housing and the dim prospects for jobs that the housing market is dependent on would keep probably keep us on the sidelines for at least another two years. We are keenly aware of the old market axiom that says, “Pigs get fat and hogs get slaughtered,” but with the remaining market excesses that have to be purged from the system, we are maintaining a liquid position. We feel there will be ample supply of existing homes well beyond two years out.

    Each individual situation is unique and what is right for one person may not be right for another and that is what makes a market…everyone doing what is in their own unique best interest. Every market transaction is ultimately an agreement to disagree. The buyer of a home feels they would rather have the home than their cash and the seller of a home feels they would rather have the cash instead of their home. The seller believes the home is no longer worth having at a given price while the buyer concludes the exact opposite. It would be nice if all disagreements could be handled with such efficiency and mutual satisfaction as the marketplace facilitates.

    Your article is very timely and presents very good arguments to consider going forward.

  4. Steven & Debra – You raise excellent points about the pendulum. There’s no way to know how far we are into the housing crash, or what direction it will take. One thing I find disturbing is interest rates. At any other time, 30 year fixed rates in the 4s would have caused a stampede into real estate, but no such flow has developed. That’s an indication that we’re far from out of the woods. Higher rates are the wild card that could push the market lower than we can expect even now.

    The flip side of course is that rates may never be this low again, and now is the time to make a purchase and get what may turn out to be the lowest rates in a lifetime. Ultimately, I think most people will move based more on personal circumstances than on macro factors. What we’re seeing today in housing, and accross the board, is risk in places where it didn’t seem to exist just a few years ago. Carefully weighing any major moves, and being prepared to deal with reversal is the order of the day.

  5. Good point about personality of a neighborhood – we moved recently and just love the neighborhood. We had a very long discussion on this last year when we were trying to decide. We ended up building a new home b/c the market for existing homes was still high in our area and we got a pretty good deal from the builder b/c everyone was looking for work at the time and so the bids came in pretty good.

  6. Jason – it sounds like you built (as opposed to “built” in a tract home subdivision, which is really a very different thing) a free standing house in an established neighborhood. That’s the best of both worlds because you already know the neighborhood. My observations are colored by life in the Atlanta area where new subdivisions of 100-500 homes are mass produced and created overnight.

  7. When we were looking for a home, existing was definitely the better buy and not only for the reasons you listed. A lot of new construction comes with a mello roos (known as special or assessment in other parts of the country) and our existing home purchase didn’t.

  8. Kay – Excellent point. And even if you’re not in a Mello Roos district, builders are usually required to pay for basic offsite amenities, such as streets, sidewalks and environmental controls that are pro-rated to the cost of your home.

    With existing properties, you’re paying true market value, since the owner isn’t in a position to pass any higher costs on to you regardless of how much he or she paid for it. And of course, the cost of offsite improvements were paid through the original purchase. If you’re buying a brand new home, you’ll be the original purchaser bearing those costs.

  9. When we moved back to our home town about 13 years ago, we bought a 70 year old home with lots of character. Unfortunately, the electrical work, bedroom size and energy efficiency were outdated. I could actually feel a breeze when sitting near some of the windows! In the end, our family outgrew the house, although we still loved some of the great features like giant hardwood baseboards and cool french doors.

    We ended up building a home in a newer neighbourhood in between where my husband grew up and where I grew up. (We both used to ride our bikes by the undeveloped area on which our home now sits.) At the time we built the house, we were at a point where we were tired of settling for less than we wanted, so we built the house just the way we wanted it.

    We love our home. (We’ll love it even more once it’s paid off next year! ;)) There are only a couple of things we might have done differently. But really, I wouldn’t want to build a new home again. Keeping on top of the contractors was a daily chore for my husband, and his business did suffer a bit as a result. You get to choose everything, but it takes a lot of time and effort to decide what you want and where to get it at a good price.

    Overall, I’m really glad to have experienced both types of housing, and I’m really happy with my new home. But I would only want to undertake building a home once. I hope to retire here and one day have my grandkids sleep over in their Dads’ old rooms. Either way, both types of home ownership beat renting hands down.

  10. Balance Junkie – You’ve had both sides of both existing and new homes. The fact that the first house was 70 years old made the “existing” part of it even more pronounced. At that age if the house hadn’t been updated, energy efficiency and electricity are two predictable problems, neither of them small. A house that age is one you really have to love when you buy it, otherwise it can be really frustrating.

    What you relate about the new home is something I’ve heard before, especially among those who have actually had a house built (as opposed to a tract home where the builder takes care of everything). There are so many components to a home that most of us never think how much goes into it–unless you’ve had the chance to build from scratch.

    Nice to see you stayed in both homes so long. That’s the best way to build equity.

  11. In my opinion, I think I’m more inclined to go for the new home. I believe it would cost me less in terms of repair and maintenance unlike in buying existing homes. Having said that, in choosing a brand new home to purchase, it is highly suggested that you pick one that suits your preference in the sense that you won’t have to install additional features.

  12. Good point Jason. Anything you add after the closing will be a direct out of pocket cost and not financed through the mortgage loan. The purpose with new is to have it all up front precisely to avoid the nickel and dime nature of adding features the way you would on an existing home.

  13. Our last two homes were new built and the one we are building now will be as well. Our first new build was one we planned and built on rural acreage. The one we are in now is a duplex in a small subdivision and the one we are currently building is in a newly developed subdivision outside of town. So obviously we lean toward the new vs. existing. I do think you pay a premium for new over existing as I look at the real estate ads and existing homes much larger than what we are building are actually going for less money than we are paying. Of course all of that is due to the increase in building materials, appliances etc. Once a price gets locked in, suppliers are reluctant to lower it even though their cost may decrease due to the cost of oil impacting many things builders use, as well as the cost to deliver being less. On the other hand, there are many recent innovations in things like tankless water heaters, insulation and furnace efficiencies that while costing more, offset the utility cost through better efficiencies etc. As with almost everything financial, there are trade-offs and it simply becomes a decision as to what you are willing to pay.

  14. I agree Kathy, it really comes down to personal preference more than anything. With existing, you’ll pay less now, but more over the course of owning the house. With new, you’ll pay more upfront, but less after, especially in the first few years of ownership.

  15. Kevin – I’m doing a hybrid. I just bought a very distressed, foreclosed home for cash (at half the going square foot rate) and am doing a 100% remodel. The floor plan will be reworked, an addition put on, new everything – electrical, plumbing, roof. I’m going to install solar, tankless heater, as well as rain-water collection.

    In the end I’ll have a custom home, know how everything was done, picked the materials, etc.

  16. Hi Oliver – That sounds like a real project. I hope you can live in it while you’re making the renovations, that way you don’t have a double house payment in the interim. I also hope you’re able to do a lot of the work yourself, otherwise it’s like building a new house, cost wise.

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