Three reasons why new home prices will slow by more than existing home prices

TRD New York /
Sep.September 24, 2013 08:57 AM

Economists have warned for some time now that home prices are set to slow in second half of 2013. Paul Diggle at Capital Economics points out that the pace of new home price growth is set to slow by more than existing home prices. Diggle expects this to happen for three key reasons.

First, younger buyers are more likely to purchase new homes, as compared with cash investors that are looking at existing home sales. Younger buyers are more reliant on mortgages and “this is a disadvantage when credit is tight and mortgage rates are rising.”

Second, the inventory of new homes climbed 13.1% over the past year, compared with the inventory of existing homes, which is 6.3% below its level a year ago.

Third, demand continues to remain strong among investors for the current stock of existing homes for sale and this is expected to “sustain the strong upward pressure on lower tier existing house prices.”

While there is some volatility in the Census Bureau’s measure of single-family home prices and NAR’s existing single-family house price, Diggle reminds us that new home prices fell less than existing home prices during the crash, and have rallied more since the onset of the recovery.

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