Of Sticks and Bricks -- Why Buy New?

There is more than one reason people buy homes “with experience.”

One may be that if other people before them took a chance on a buying a used home, it may seem like a relatively safe bet.

Another one might be that the neighborhood is established, the landscaping is mature and that commercial and retail businesses already exist nearby.

And yet another may be that so much has already been done to the house and the property that whatever isn’t to a buyer’s liking when he or she moves in can be torn out and changed to individual tastes down the road.

Then there are those who just prefer older homes, period.

From an investment standpoint, however, older homes may have already experienced the lion’s share of their appreciation within the first few years they were in existence. It’s those first new homeowners back in 1975 to 1980, for example, that watched their $65,000 price tag eventually transform over the years from the original value of their house to the figure they may need just for the down payment on their next house…..

It’s an interesting analogy, but homes experience a life of their own once they are “born” into a neighborhood. It is in their infancy that newly constructed homes can experience the most rapid development, value-wise, especially when a particular new home area is finished or what is called “built out.” Although some parts of the U.S. have slower appreciation rates than others, according to appraisers it’s usually the first seven years that see the most rapid value growth. In faster growth areas, however, this trend can start as soon as the third year of ownership.

It’s true that houses, as with other investments, can become more valuable the longer they are held. After much of the first decade of ownership has passed, however, home appreciation may be steady but not overly significant. There are exceptions to any rule, of course, such as an older area whose homes suddenly get transformed by an influx of well-heeled new owners. Or perhaps an entire area is being “gentrified” after having languished for a long time.

Some parts of the U.S. experienced a frenzied real estate market several years ago, where sellers could set a date and time for “bids” to be submitted to sell their homes for an outrageous amount of profit. But the pendulum inevitably swings in the other direction as well. Interest rates and available loan programs change, lenders tighten up their qualifying guidelines for those applying for financing, job markets fluctuate, the amount of debt people carry rises, and economic indicators or national news trends can make some people skittish about investments. Eventually, the market reverts back to one with more balance for both buyers and sellers. but it is still believed that land is not in infinite supply, making buying real estate a wise investment decision in the big scheme of things .

New home values can exemplify the old “what came first, the chicken or the egg?” syndrome, because it is truly the first buyers that close escrow that begin to establish value in any given area. In fact, the phenomenon of home building in the U.S. radiates out to support so many different industries that economic forecasts for the entire country include housing starts as a snapshot of economic stability and growth rates.

Homebuilders try to choose up-and-coming areas, attempting to see into the future for their homebuyers. Those Baby Boomers and even a few Gen-Xers among us may never have heard the term “master-planned” to describe these new kinds of neighborhoods.

So what does this term mean? Generally speaking, a master-planned area is one built from the ground up with amenities we may look for in any area – parks, hiking or biking trails, lighting and landscaping corridors that make the area perennially attractive, and sometimes a golf course or clubhouse and pool—the themes can vary. Land developers usually work with more than one homebuilder to offer several kinds of neighborhoods that can appeal to a variety of age groups and price points. These areas may have perimeter walls or security gates and most have a branded name that sets them apart from the rest of area.

The rules everyone who buys a home in a master-planned area must observe may be much rigid than in older, eclectic neighborhoods. “Streetscape” violations that are considered to detract from overall property values in an area may address unusual exterior paint colors, types of trees that have destructive root growth or that get too tall or too wide, permanent basketball hoops nailed over driveways, always-open garage doors, inadequate landscaping maintenance, or untended house exteriors. For some homebuyers, compelling reasons can be made for NOT opting to purchase within a master-planned area (not enough freedom to live whatever way you’d like) as well as FOR them (control over maintenance and appearances can protect homeowner equity).

It stands to reason that when some of these grand, new master-planned areas crop up, retail and commercial businesses begin to surround them, especially if there is a lack of them to begin with in a particular area. The influx of new property taxes and the need to fill the demand for new residents can have a tremendous effect on value in a given area. This is all because a developer decided to “take a chance” on those acres of land after performing some demographic research to help hedge their bets.

Homebuilders sometimes build in some automatic equity by default. For instance, many people will hesitate to buy a home in the first phase of a development – kind of like the hesitation to buy a car within its first model year. It seems that some people refuse to be the first -- for fear that others may not jump on the same bandwagon with them. But in new home construction, it is usually the first homes built that can build up the highest amount of appreciation. Why? Builders can raise prices with each subsequent release of homes, phase by phase. That’s because builders not only can incur the rising cost of materials and labor -- they also have to pay land-hold costs for what can amount to several years before all the homes are sold and they can pay off their construction loans. Some buy the land outright, and others buy in rolling options so that they are not overexposed financially. Each land option purchase usually costs more than the last and the difference can be reflected in what you see on the builder’s price sheet as the neighborhood takes shape. Another reason builders raise prices is because simply because they can in our free enterprise system. Demand can fuel higher profit margins, period. In today's market, however, builders are offering some of the best values -- huge incentives, aggressive prices and help with financing for interested buyers.

Many growing communities have caught on to the fact that they can make nearby new homebuyers pay for expansion costs with impact fees. Costs for new roads, sewers, and other services that may be used by the whole community are directly assessed to new homes, causing builders to pass along the fees to the home buyers. Cities have also figured out that by demanding that certain-sized homes be built with complex building restrictions and codes, the values will increase, generating more tax revenues for the city and drawing a desirable buyer demographic.

Unlike the temptation you’d have to sell a stock when the value gets high, this type of investment still is, for most people, not only about dollars and cents. It’s about the quality of life. A new home may be where a baby takes its first steps -- where a family reunites at holiday time -- or where those who have labored well can now sit back and enjoy the “relaxing” years they’ve earned.

Indianapolis-based homebuilder C.P.Morgan’s Mike Rasmussen points out the perception that to many consumers, NEW means more expensive, as with cars. This is not necessarily true with homes, since builders compete with the re-sale home market in any given area.

As with any investment, however, no one has a crystal ball to guarantee that buying a new home will always result in profit. But as we mwntioned earlier, however, land is finite and homebuilding is historically a continuum in the U.S., a home purchase can become one of the most stable investments most of us will make in our lifetimes.

Now that we’ve touched on whether a new home can be a prudent investment, let’s look at some other things to think about when deciding to buy in a new home neighborhood.

There is that feeling of belonging in a new home neighborhood that can’t quite be put into words. It’s as if everyone is rowing with the same oars. Everything is new and every neighbor is new – so it’s as if you’re in a special club of sorts. Like you, neighbors are wrestling with boxes, new utilities, new lawns and sprinkler systems, trying to find good babysitters or experimenting with how to set their new thermostats. Literally everyone is the new kid on the block! Just like the newly planted neighborhood trees are all growing at the same time, families are too – leaving a trail of beginnings, growth and change all over the community.

Unlike established neighborhoods, where long-standing relationships may have been formed and cliques can exist, new homeowners share something unique. Something that can create a strong bond between neighbors, since they all tend to rely on one another in the early days of nesting there.

One of the most common reasons people cite for buying a brand new home is that they can order up precisely what they want-- making it a reflection of their own personalities and tastes. A new house is a clean slate. No one has ever cooked in it, slept in it, or decorated it before.

Just as attractive is the idea that most upgrades added to a new home can be rolled into the original loan if you upgrade through the builder. Paying for them over 30 years somehow makes it less painful to choose those gleaming granite kitchen counters, that built in theater system you’ve always wanted, and the five-burner restaurant style cook top you’ve seen only in magazines until now. Builders’ design centers offer you a dizzying array of shiny new products and surfaces, making them a menu of possibilities to make your home precisely what you always dreamed of. Contrast this with a house that may need new carpeting, whose burgundy bathroom tile makes you nauseous, and whose kitchen contains appliances your parents might have purchased back in 1976 – even if it is all changeable over time.

Depending on the builder and the stage of construction of a particular neighborhood, buying new means that you can choose the elevation (exterior appearance of the home). Many builders have three to five (or more) versions to choose from with stone, brick or siding accents, making the same floor plan appear less uniform than homes did back in the ‘50s, when the only difference between them was the pastel colors they were painted. Builders have color palettes from which to choose, and some will even work with you so that your walkways and driveways look more customized than the usual concrete fare.

Then there are floor plan options from which you may be able to choose – loft options, den options, playroom options, finished or unfinished basements, master retreats, tech centers in bedroom landing areas, butler’s pantries, deck and balcony options among them.

If you get in on the “ground floor” – so to speak – of a new home neighborhood, you maybe able to choose your own home site within the neighborhood, unlike hoping to find a well-located re-sale home. We’ll talk about different locations within a neighborhood and what the plusses and minuses may be for each type, but suffice it to say that being able to “walk the dirt,” determining where your house will be, which of the available home sites suits you best in terms of size, and what your new home might overlook can give you a sense of choice not available in a used-home neighborhood – that is, unless you have the patience to wait for just the right location to come along.

There is also an extremely practical side to buying new. New home builders want to and are sometimes directed to use the latest in construction methods. This is due in part to residential construction building standards steadily demanding more and more of homebuilders across the country. This can give the owners of new homes the edge on those who own older construction in terms of quality, since many of the new codes were designed to eliminate the problems and issues associated with construction methods of the past.

The Uniform Building Code was updated in 1997, demanding that builders follow very strict guidelines in home construction, especially in places where earthquakes, tornadoes and hurricanes have prompted the creation of stronger dwellings. In the earthquake-prone West, for example, builders use much more structurally supportive products than they have in years past --such as pre-manufactured wall panels, fastened by bolts and hardware to enhance “shear wall” quality. A shear wall or load-bearing wall is designed first and foremost to support the home’s structure.

These are the types of behind-the-walls amenities new home salespeople and builder brochures and advertising may not mention, since builder marketing firms would consider them a reflection of the less glamorous side of new home construction. Apart from that, however -- no one asks about them!! Once you begin to question a builder about their construction methods, having them explain why they are building their homes with certain products, you can begin to compare them and then feel more peace of mind about where your money is about to be invested. As a wise consumer, your interest should address much more than just the number of bedrooms and baths, the appliances in the kitchen and the tile in the entry way. It should include a healthy curiosity about the quality that goes into the house that you can’t readily see as well what it right before your eyes.