How Affordable is the New Home Premium?

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Earlier we published a post highlighting lower operating costs per dollar value for new homes. This post takes the analysis a step further and shows that home buyers can afford to pay a 36% premium for a new single-family detached house, compared to the one built before 1960, simply because it is new and has lower operating and maintenance costs.

Typical annual operating costs of running a home include property taxes, insurance, maintenance and utilities. These do not include mortgage payments – often the most expensive cost of owning a home. Combined together, mortgage payments and operating costs add up to overall costs of owning a home.

New NAHB research based on the latest 2019 American Housing Survey (AHS) provides estimates of operating costs per dollar value by the age of the house. On average, annual costs of running a home amount close to 5% of the home’s value but the rate tends to decline for newer homes. This fraction exceeds 6% for homes built before 1960. With newer homes, costs per dollar of value tend to decline. Home owners of single-family detached homes built after 2010 spend an equivalent of 3.2% of the home’s value per year on operating their newer homes.

Since operating and maintenance costs per dollar value are lower for newer homes, owners of these properties can afford more expensive mortgage payments and still end up with identical overall homeownership costs, compared to owners of older homes.

The table below illustrates how buyers of newer homes can pay more for their mortgages but have the same first-year costs of ownership as a result of lower operating costs. In this exercise, all mortgage assumptions are identical for buyers of homes of different vintages and operating costs estimates are based on the 2019 AHS, as described here.

The starting point in this analysis is the new homes sale price. It is set at $383,900, which is the average sale price of new homes sold in 2019, according to the Census Bureau. Using the current standard 30-year mortgage assumptions, new home buyers’ annual mortgage payments are then estimated at $18,572. New home buyers are also expected to spend 3.2% of the home’s value (or $12,255) on operating and maintaining their homes. As a result, their total first-year homeownership costs add up to $30,826.1

The calculations are then repeated for each vintage category under the constraint that all home buyers have identical annual homeownership costs of $30,826. Because the annual operating costs per dollar value are higher for older homes, buyers of older homes are restricted to making smaller mortgage payments. So the price of older homes has to be lower to keep the first-year homeownership costs constant. At the extreme, a home built before 1960 can cost no more than $282,485 to keep annual homeownership costs at $30,826.

In other words, if first-year cost is the constraint, home buyers can afford to pay a 36% premium for a new house, compared to the one built before 1960, simply because it is new and has lower operating and maintenance costs.

[1] Given the current generous standard deduction, home buyers in this example cannot reach additional after tax savings by claiming the mortgage interest and real estate tax deductions. The latest data from the Joint Committee on Taxation (JCT) confirm that most homeowners currently do not claim these deductions. As a result, the income tax saving are not considered in this analysis.



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3 replies

  1. Interesting and very useful article. At the same time usually a brand new construction in any neighborhood has a more square footage of living space than any existing house built decades ago. Additionally the amenities and state of the art technologies used in each new construction is much more superior that the older homes. New Construction homes build by builders such as ourselves (HOMEREDI.com) in Nassau County of Long Island tend to have resilient power systems ( back up Generators, Whole house filtration systems, Advanced HVAC with Humidification and Air Purification, Around the clock monitoring and surveillance security systems and much much more. Great Article. Thank you.

  2. The problem is that new houses are not in desirable locations

  3. Newly constructed homes in the Texas area are not being built bigger on average. You can buy an existing home that may be ~10 years old with much more square footage than a new home for the same price point. If you want a larger new home, you pay the price and you will most likely get a smaller lot. Not all of the time, it depends on the location obviously.

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