The Blubber

New U.S. homes are selling for $3.50 less per square foot than old ones, the widest gap in at least six years, per Zillow.

It might sound surprising, but newly built homes are now cheaper than older ones, despite having never been lived in. In May, new homes were selling for $3.50 less per square foot than existing homes, according to Zillow, marking the biggest discount in over six years. While that may not seem like much, it adds up—on a 2,000-square-foot home, that's a $7,000 difference. Essentially, buyers are paying more for older homes that might require updates or repairs.

Before the pandemic, new homes were typically priced higher, commanding a premium of $15 to $22 per square foot compared to existing homes. For a 2,000-square-foot home, that could mean paying at least $30,000 more for a brand-new property. But now, the tables have turned. Zillow reports that newly built homes have been cheaper per square foot than existing homes only five times since 2018, and this is the most significant savings yet.

In certain metro areas, the gap is even wider. In San Diego, new homes come with a $57.10 per square foot discount, in Salt Lake City it's $53.60, and in Los Angeles, it's $52.40. Meanwhile, cities like Austin, Washington DC, and Tampa see discounts of over $40 per square foot.

However, some places are exceptions. In San Jose, for instance, new homes carry a $216.60 premium per square foot, while in San Francisco it's $137.10, and in Milwaukee, it's $87.60. Zillow doesn’t offer an explanation for these large variations, but it's notable that some of California’s most expensive cities fall on opposite sides of the price spectrum.

This doesn’t mean the overall price of new homes is less than that of existing ones. On average, new homes are still about $54,000 more expensive than older homes, says Zillow. But the way prices are calculated is shifting, partly due to changes in lot sizes and the types of properties being built, like smaller detached homes or condos. "Today's new construction buyers are getting significantly smaller lots than in past years, and the lot-size advantage of buying existing homes is growing," Zillow noted.

The cost of existing homes has surged 52% since before the pandemic, while new homes are up just 26%. This is a result of the pandemic-driven housing boom, where prices skyrocketed, but then slowed when the Federal Reserve raised interest rates to curb inflation. Mortgage rates shot up, and many potential sellers chose to hold onto their homes. Now, there are 33% fewer existing homes for sale than before the pandemic, with even larger shortages in certain markets.

While existing home prices have soared, builders of new homes offered incentives to reignite demand, such as mortgage rate buydowns or constructing smaller homes. In May, the median price of new homes sold was $417,400, slightly below the median price of existing homes, which was $419,300.

For a time, new home sales outpaced those of existing homes as the latter dropped to a nearly three-decade low. However, in May, new home sales unexpectedly hit a six-month low. Both existing and new home sales data for June are expected soon, which may offer more insight into how the market is shifting.