Yesterday Sheldon talked about the number of new and vacant properties on the market, and it made me wonder – what’s been happening with the prices of resale homes compared to new homes?
At the end of 2007, CMHC explained at the Housing Outlook conference that the gap in pricing between new homes and resale homes had grown quite large in the Edmonton area, and suggested that new home prices would need to come more in line with resale homes.
Now, my stats only include homes sold on MLS, and may in fact include a number of resale homes since I can only separate the sales values by the age of the home. Never the less, I plotted the average sale price of homes built in 2007 and newer, and those built in 2006 and older. Here are the results:
It seems the average price of new single family homes and older single family homes has dropped at approximately the same rate. When it comes to condos, the older ones have held their value better than the newer ones (and single family homes for that matter).
I also noted that the newer homes and condos were larger on average than the older ones – newer homes were 1800 square feet while older ones were 1365, newer condos were 1050 on average and older ones were 970. Now, when it comes to single family homes, some of that difference in size can be attributed to the different styles of homes; just by driving around a new subdivision you can see there are more 2-story homes being built these days than bungalows which tend to have smaller square footage.
Which leads me to price per square foot…
Before you get too far thinking about this chart, there is one fact to keep in mind and that is the larger the home, the lower the price per square foot. We know that the newer homes are larger on average, so it makes sense that their price per square foot would be lower for the newer, larger homes.
I was surprised to see that older condos and newer single family homes are very similar in price per square foot, as were older single family homes and newer condos. I guess this is partly attributed to the fact that with a new home comes a lot of extra expenses like landscaping, fences and decks, and sometimes garages and basement development, while those costs are already built in on a resale home. One thing for certain, they’ve all come down over the past year, and all at approximately the same rate.
I as well have noticed this. When I was looking at purchasing a home I noticed resale homes have dropped around $80000 for $550000 home since the peak. New construction hasn’t changed at all. In fact lot prices have gone up and construction cost have stayed the same ( Labour, material). I disagree with your graphs though as I think it’s misleading. Spec homes on the market from the builders may be the best buy as builders right now are the most motivated seller. When you have a hundred homes that you need to get ride of you can afford to take a bit of a hit just as long you come close to breaking even. Just my opinion.
Thank you for the stats, Sarah. Greatly appreciated !
Lumber costs are down to 2003 levels and the actual lots have dropped in price in a few of the new south Edmonton communities.
New home prices will begin to go down if sales keep going at this rate.
Allin,
Don’t know where you’ve been looking but a lot of new homebuilders dropped their prices by up to 80,000 in the Late Jan-early Mar time frame. The ones I am most familiar with certainly did re-negotiate with their trades and I know of at least 2 that are taking a percentage off the lots that they hold in inventory. I also agree however that buying a home from a builder who was specing them out holds some of the best opportunity for a steal of a deal.
Just remember that if you are buying from a builder to be prepared for some headaches in terms of the quality of home….
Have a couple of friends who can attest to problems such as poor bannisters (weight of a 6 year old child could not be held), flooring (slopes, soft spots etc.) and so on…
Anything built pre 2004 you should be okay – unless you work for local news stations like another friend (who amazingly didn’t have any problems with their new home…)
We’ve found (talked to a couple builders) that prices have remained the same if not gone up since last spring. Builders seem either totally out of touch or tied to costs that have made them a poor choice in todays market.
Another item I wanted to mention is that my co-worker had made an offer on a spec-home about two weeks ago, but when the bank came in to price it for a mortgage gave it an evaluation far below the price accepted ($30,000). So the deal was about to be cancelled when the builder gave him a $30,000 “re-bate” so that the price would not be affected (still look like it was worth the higher price). First I’ve ever heard of that. Anything to prop up the specture of higher value/cost I guess.
This snow is starting to get to be a bit much.
I looked at building just before Christmas. So it may be true builders are starting to re-negotiate with their trades but I still think that Sara’s post is accurate as they have a ways to go to catch up to resale. This explains why new homes are NOT being built right now. Lot prices and builders need to continue to lower their prices. It’s also a little scary to lock your self in for X amount but not move in for a year. Who knows how much that property will be worth in a year?
National Mortgage debt levels exploded in 2007.
http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=ed72ed5e-1ac3-4705-86c9-45bcb8a9642c
Up 13% or 94 billion nation wide. Insane amount of growth in the real estate industry. Seems like a lot of first time buyers and people doing heavy upgrading and taking on record amounts of debt.
Just another thought on new vs used, if you are buying from a speculator then you must remember that the warranty was triggered at completion to the other buyer not you. That means a 6 or 8 month old houses that is still brand new and un lived in only has the remaining 6 or 4 months of warranty. Buy from a builder and you get the full 12 months and who knows maybe even a perk or two as they have the means by which to get things done where as the speculator is probably not even in the construction business. there is alot to consider before you buy something so why not take your time and find the best deal at the right price. I am.
I love all the snow! My Porshe feels like a skidoo! And I bought it with all the money I made in real estate. Can’t wait till prices bounce back this summer, I’m gonna buy a Ferrari this time!
Hey Richie Rich,
Do you mean “Porsche”? Learn to spell correctly first!
It is time to wake up and go back to work. Forget about the Porsche in your dream and go buy your bus pass for next month!
Why would I take the bus when I could take the Ferrari I’m gonna buy when prices go way up and all my houses sell? And who cares how I spell, you still eat my dust!
Now here is a thought: Use the appreciation in Real Estate to purchase quickly depreciating assets, like a Porsche, and a few other toys….
If you do that with the profits of a sale, it may not be the wisest decision, in the long-term, in my opinion, but so be it.
However, if you do that with money borrowed against a home-equity line of credit, no wonder you won’t be able to set the list price of your resale home based on the home’s market value, but based on how much you owe on the line of credit….
Maybe that’s why so many high-priced properties sit around forever without a price reduction!
mdm,
In these types of situations, it seems that home prices can linger sideways for some time. It has happened in the past. Often before strong declines.
I wonder what things will be like if homes skid sideways here for a couple of years?
In that scenario, for a $400,000 house at 40 year amortization, 2 years of payments would total $56,821 and of that sum, $4321 of it would have gone towards the principal. These figures are for the mortgage only of course, and do not include property taxes, utilities, maintenance, home insurance, which add to the costs greatly.
In this environment, will people still be willing to buy in if the days of double-digit gains are gone?
When homes were shooting up at speculative rates like 20-40%/year the risks associated in paying too much for a home did not exist. People knew they would “make” $100,000 in equity by the next year.
It isn’t a pretty picture when you consider that even if home prices do not fall (rather slide sideways) that at these prices this is still a financially unfavorable position when compared to rents. The other scenario where home prices decline, is far worse.
In every bubble there is usually wealth creation, and when these bubbles burst, you get wealth destruction. I cannot think of any other way to describe losing equity/down-payment other than calling it wealth destruction.
If you are interested in buying a home, try something new:
Do a search of comparable houses that are being rented out. Take this monthly rent cost and figure out what price the house would have to be to make the mortgage payment equal the rental cost.
Next, add on a 5% tip for the seller and 3% for the selling fees and you have your offering price.
If the rental yield of the property in question is far lower than the mortgage payment you would have to pay to own the place, then in this market you would be better off renting for the time being if this market goes best case scenario – sideways. And especially if prices continue to fall – ouch.
At the end of the day, I am doing this comparison as though a home were an investment. If it is a place to live, then you may have to look at the numbers more liberally.
But…as much as your family needs a place to live, think about what kind of premium you are willing to pay for that luxury of ownership. Are you willing to pay a college tuition in depreciation/lost-equity for that?
Unfortunately friends, much like how oil is currently being speculated in by off-balance sheet, unregulated investment channels, so was housing via the securitization of mortgages. These types of investment $ are parisitic and move from one host to another, and if you look around at other countries throughout the world, you can see the clean carcasses of Real Estate industries laying in the sun. Our RE industry in Canada is no different.
Michael, I agree with your assessment.
As I mentioned earlier on this blog, we sold our overly appreciated McMansion last April and traded it in for a nice smaller house half the price. The hope was that we would lose less equity on the smaller house, if it turns out that we are, in fact, in a Bubble.
We did hold on to our starter rental homes, purchased before prices went crazy. Again, our assumption is that the Bubble will not burst because of a general recession, doom and gloom, but because too much speculation drove prices and new construction up too high. Therefore, houses in the lower price range should not suffer too much.
Now we are sitting on the fence, waiting which way the McMansions move.