Price Gap Breaks Open Between New and Existing Homes

Bob Johnson: This week's chart shows the median price of a home, one for new homes and another one for existing homes.

If you look at the graph, you can see in the early 2000s that a new home price was always more, but not that much more, than an existing home price. There was very little penalty for going out and buying a brand new home.

But since the recession, things have really changed. The gap is the widest it's been in history. In fact, a median new home price is $280,000 versus something like $205,000 for an existing home--a huge gap.

That gap has several causes. One is that builders haven't got that many lots right now, because they shut down buying more lots when the recession hit and they focused on maximizing profits on existing lots and on higher-priced homes, not leaving much for the low end of the market. Also, the price of raw materials that go into a home, including labor, have begun to rise, making the cost of building a home go up as well. So now we have this very wide gap.

I think that gap will need to close; we really want to get the new home market going again. What will make that happen? I think builders will have to set up more developments and focus more on lower-priced homes before we'll see the new-home market really explode yet again.