The “problem” began in 2020. As the pandemic kept people indoors, things started to feel a bit claustrophobic. Renters and existing homeowners alike felt the need for more space. It was the perfect time to buy a beautiful new home—and people did. Housing inventory reached record lows, new builds backed up, and buyers engaged in bidding wars.
Then the housing market overheated.
In the years that followed, the median home price exceeded $400,000 and became unaffordable for many would-be home buyers. Interest rates hit almost 8% creating a mortgage lock-in effect for existing homeowners. Housing inventory remained extremely low despite builders adding millions of new homes in the past few years.
And that leads us to where we are today—a market that has people saying, “Let’s just renovate.”
So, is this bad news for residential builders? Is there a way to turn those DIYers into new construction homeowners? How can builders keep breaking ground when many people feel like they financially must stay put?
PWSC’s real estate and construction experts have the answers…and they just might surprise you!
The Realities of Renovations
The Harvard Joint Center for Housing Studies (JCHS) expects home renovation spending to hit about $485 million by the end of the year. A recent Houzz and Home Study found about 52% of homeowners plan to embark on an improvement project.
The age of U.S. housing stock is between 42 and 51 years, so giving homes a facelift makes sense. The financials matter too. Simple renovation projects are cheaper than buying a new home. Homeowners can stay with their likely sub-4% mortgage rate. Plus, limited housing inventory can make finding the perfect home expensive and difficult.
But the numbers are not all bad for residential builders. Since home renovations ramped up during the pandemic, things have started trending down. The Fed also issued some hopeful news at its September meeting: a larger than anticipated rate cut, the first interest rate reduction in more than four years.
Move or Improve: Giving Homeowners Something to Think About
Spending a few thousand dollars on existing home improvements versus spending hundreds of thousands of dollars on a newly constructed home seems like a no-brainer for budget-conscious homeowners. However, the math can be deceiving. So can the complicated nature of remodels. Here are valuable things for builders to consider when countering these common homeowner claims.
“Buying a home and renovating saves money.”
A study found that not only are the people buying resale homes paying historically high prices, but they are immediately spending an additional $30,000 on renovations. For families in their homes less than five years, the price tag is $19,000. At that cost, buying a new-construction home customized to the buyer from the beginning is a viable financial option.
“We can’t afford a 7-8% mortgage rate on a new home.”
Even with hints of mortgage rate reductions on the horizon, significantly lower rates are probably more than a year or two away. Many people understandably don’t want to double their mortgage rate to purchase a new build. However, they likely are paying higher rates anyway for that seemingly cheaper renovation.
About 35% of homeowners are financing home improvements on their credit card, a trend that is on the rise in recent years. The average credit card rate in the US is almost 25%. In contrast, homeowners can build a new home to meet their needs at a higher mortgage rate, then refinance as soon as rates come down. The interest cost for carrying a high credit card balance is closer to the price of a higher mortgage rate than most people might think.
“Renovating our existing home is faster.”
Not so fast. Building a home takes about six months to a year. Depending on the renovation, a project can take anywhere from one to six months—longer if it is a whole-home remodel. However, home improvement contractors have had a backlog of projects since the pandemic. The volume of work, compounded by labor shortages and supply chain delays, has clients waiting for months just to get started on a renovation.
As a result, about 43% of homeowners have do-it-yourself improvement plans. Unfortunately, about 27% of them will end up having regrets about their renovation. The biggest reasons are going over budget, taking too much time, not hiring a professional, and disliking the results. New construction avoids these woes.
“But what about the maintenance?”
When it comes to moving or improving, builders and homeowners often neglect one important consideration: maintenance costs.
Aging homes develop additional problems over time. They will experience malfunctions more frequently. According to data from the Thumbtack Home Care Price Index, maintaining a single-family home now costs a staggering $6,600 per year.
Compare that to new construction homes which are largely maintenance-free from major issues for the first few years. But for added peace of mind, builders can offer homeowners a 2-10 insured structural warranty along with systems and appliance protections to keep a new home covered from foundation to fridge. Warranties offer a cost-effective way to attract buyers and instill confidence in building a new home rather than patching up an old one.
Incentivize Prospective Buyers with PWSC Home Warranties
Home renovations can be expensive, time-consuming, and disappointing, not to mention disruptive to everyday life. The hidden costs, in addition to the real price tags, make renovation a risky proposition. Having the right conversation with would-be buyers around the realities of remodeling can help builders sell the benefits of new construction. Incentivizing the deal with warranty peace of mind for 10 years only boosts confidence that buyers are making the right decision.
PWSC home warranties protect the quality of the home and the pocketbooks of homeowners. Why renovate a home—and endure the hardships and headaches—when you can build the perfect one from scratch? With PWSC by your side, helping buyers answer this question gets even easier.
Contact PWSC to learn more about home builder warranties and other risk management solutions.
