Why New Construction Homes (Sometimes) Depreciate Like Cars

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If you are in the process of looking for a new home, you might be frustrated because you cannot find anything that is quite right. Even though there might be a lot of houses on the market, each house has its own benefits and drawbacks. You might be ready to find your dream house, and nothing quite seems to match your vision. Eventually, you get frustrated, and you decide to build your own house.

Then, you take a look at the price tag, realizing just how much money you will have to spend to make your vision come to life. When you do your research, you might even find that new houses could depreciate in value. But, you may have also heard that people invest in real estate because it generally goes up in value. There is a clear disconnect here, so what do you need to know?

New Houses and New Cars: What To Know

The sign outside a Chevrolet dealership
The sign outside a Chevrolet dealership

There are a lot of people who compared new houses to new cars. Even though they are some merits to this comparison, they are not identical. New cars will depreciate in value very quickly – losing up to one-quarter of their value in the first year alone.

That is because cars will eventually become so worn out that they are not able to be used anymore. Nobody is going to pay a lot of money for a car that is going to wear out in a few years. If you take good care of your car, it may last longer, but it will eventually burn out.

That is where the comparison to new houses comes into play. New houses can also depreciate in value. They have a lot of luster when they first go up, so people are willing to pay a premium for them. Then, as housing trends change, that house will become less attractive, causing it to drop in value.

On the other hand, there are houses that have been standing for more than 100 years that people still buy. As long as you take care of your house, and as long as the conditions are right, your house should hold its value. There is even a chance that it might go up in value.

Because real estate is an investment, you need to understand why new houses are so valuable, when they might go up in value, and when they might go down in value.

Understanding a New Versus an Existing Home

Outside view of a few new construction homes
Outside view of a few new construction homes

The vast majority of homes on the market are sold by their current owners. In general, new houses are not nearly as common as existing houses, but there are some parts of the country, such as the southeast, where new homes continue to make up a significant portion of the market.

There are plenty of situations where an existing home will come with an expensive price tag; however, they are generally not going to be as expensive as a brand new house. That is because existing houses may not have been built with expensive materials, and the cost of labor to build that house may have been lower decades ago.

Furthermore, the price of an existing house is chiefly going to be dictated by the current market rate. If the home is a quality house, and if there is a lot of demand for houses, then the price of an existing house is going to go up.

Even though a newer house is also going to be reflected in market conditions, it is also going to be dependent on the cost of labor and materials used to build that house. Therefore, the calculus that goes into pricing an existing home versus a new home is going to be different.

Keep in mind that people who are interested in building their own homes are willing to pay a premium to make sure it is absolutely perfect. If you purchase a brand new house, you probably have a lot of confidence that nothing is going to go wrong with the house in the near future.

The roof is going to last for decades, the HVAC system is going to last for 15 to 20 years, and the hot water heater is going to do the same. When all of this is combined with the house being perfectly customized to match your needs, it is easy to see why people are willing to pay more for a new house.

When New Construction Homes Go Up in Value

Various stacked coins and houses going up in value
Various stacked coins and houses going up in value

Next, it is important to understand when a new construction home is going to hold its value and when it might drop in value. Even though there are a lot of factors in play, understanding these factors could help you figure out if building your own house is right for you.

There are several scenarios where a new construction home will hold its value or go up in value. They include:

1. You Stay There for a While

In general, you should expect to pay a premium for a new home. This means that you might be paying over market value when compared to a similar house that has been built several years ago. Therefore, you need to give the market some time to catch up to the current value of your home if you want it to go up in value when you sell it. If you plan on staying in the house for a few years, the market will catch up to you, allowing you to make money on your investment.

2. You Are the First, or Last, Home in the Development

If you want a good price point on a new home, you generally want to be one of the first houses in the development or one of the last houses in the development. If you are the first person in a new development, they will probably provide you with a lot of incentives to bring down the price. They know that you will have to deal with the noise of other houses being produced in the immediate vicinity, so they might be willing to give you a better deal.

Furthermore, if you are purchasing the last lot available in the development, you may get a better price on your house. The developer might have realized that it is taking longer than anticipated to complete the neighborhood, so they might provide you with some incentives. If you can get a lower price for your house, you have more room to appreciate in value.

3. You Do DIY Work To Finish the Job

Tiling a kitchen wall with adhesive pre-spread on the wall
Tiling a kitchen backsplash yourself

Even though you probably will hire a construction company to do a lot of the work, you might be able to save some money if you are willing to do the finishing touches on your own. Do you think you can install your own kitchen backsplash, or make one out of tiles? Do you think you can install your own shower?

If you can reduce labor costs and source your own materials, you might be able to save money on your house. This could make it easier for your house to go up in value.

4. The Neighborhood Is Growing Quickly

There are plenty of factors that are outside of your control that will have an impact on the value of your house. For example, if you are in an attractive neighborhood, your house will be worth more money because people will want to live there.

For example, if the school system is particularly strong, if there are a lot of new jobs coming to the area, or if there are plenty of amenities going on around you, there will be a lot of demand for houses in your neighborhood. This could cause your property to go up in value quickly.

5. You Keep Everything in the House Neutral

If you plan on selling your house in a few years, you need to make it as attractive as possible to a potential buyer. Even though you may have some quirks, idiosyncracies, and eclectic decor in your house, this is not going to be attractive to everyone.

Therefore, you should make an effort to keep everything in your house neutral to appeal to as many people as possible. This could help you get a better offer for your house.

These are a few of the reasons why new construction homes might increase in value.

When New Construction Homes Go Down in Value

On the other hand, there are a few situations where your new home might go down in value. They include:

1. When There Are Problems With the Construction

An internal crack down a wall just above a door frame
An internal crack down a wall just above a door frame

If there are problems with the construction of your house, it could have a significant impact on the value of your home. Sometimes, there are materials used to build houses that sound good in theory, but ultimately lead to more problems than they are worth.

For example, if your house was made with PVC pipes, or if your house was made with stucco, these materials are known to have significant problems. They could have an impact on the value of your home even if it is a new construction house.

2. When The Market Turns South Shortly After Buying Your Home

Furthermore, market conditions could also cause the value of your house to go down. If you build a new construction home when prices are appreciating rapidly, the bubble could burst shortly after you finalize the purchase of your house.

2007 to 2011: The American housing market was in a bubble in the early 2000s, but this burst in 2007 due to the financial crisis – resulting in house prices falling by as much as one-third.

As a result, real estate prices could drop across the board, and new construction homes are going to be more sensitive to the price drop. That is why it is better for you to stay in a new construction house for a while if you can.

3. When You Don’t Take Care of the Home

Finally, if you don’t take care of the house, its value will begin to drop. Your house is an investment, and it is important for you to take care of it. This means getting the HVAC unit inspected regularly, making sure the hot water heater is working as it should, and paying close attention to the roof to address issues before they spiral out of control.

If you don’t take care of the house, issues are going to show up on the inspection report, and they will hurt the value of your house when you sell it.

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About Charlie D Paige

Charlie is a massive DIY fan, with dozens of DIY projects under his belt - ranging from tiling to electrics, and concrete pads to walls. Charlie loves tinkering, seeing how things works, the outdoors and playing with power tools... so is it any wonder that he's completed so many DIY jobs over the years?

Charlie loves spreading his hard-won DIY experience with the world via this blog.