The Pricing Shift for New Homes

Prices in thousands

It’s not easy being a home builder these days. Total sales have hit record lows, foreclosure resales are pulling away potential buyers and people remain unwilling or unable to borrow at today’s low mortgage rates.

And, oh yeah, home prices are falling.

Rick Palacios Jr., a senior research analyst at Irvine, Calif.-based John Burns Real Estate Consulting, has a note out Friday arguing that builders need to look at the changes in consumer attitudes behind the lower prices. Buyers want affordable homes, he says, making sales between $200,000 and $300,000 the “new normal.” “In order for a genuine spring-selling season to materialize builders must pay close attention to this structural pricing shift that continues to unfold.”

As evidence, Mr. Palacios points out that since new-home prices peaked in 2007, new single-family sales of more than $500,000 have gone from 13% to 6% of the market. Sales of new homes priced under $300,000 now account for roughly 75% of all new single-family deals. On a regional basis, the West has seen what Mr. Palacios called a “radical shift,” with newly constructed homes under $200,000 doubling their share to 24% of sales in 2011. These drops have come as buyers have sought out smaller homes.

“I think it’s just kind of coming to grips with the reality of what people can afford,” Mr. Palacios said in an interview. He added the process also involves returning to pre-bubble norms for prices.

Other the other hand, all is not lost for luxury builders, the research says. There’s less competition for them, and their share may tick back up if the economy continues to improve. High-end sales also remain healthy in the Northeast, comprising 20% of new-home sales last year.

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