Mortgage Advice

Will New Construction Impact the Value of My Home?

January 20, 2016

Imagine you just purchased a 10 year old home. The neighborhood is nice, the price point was within your budget, and you secured an affordable mortgage. Fast-forward three years and the house across the street from you has been knocked down so a new, custom home can be built. Then the house next to it is torn down for a remodel, and the house next to that one is also being reconstructed! With new construction popping up left and right, take these questions and scenarios into account when assessing the value of your existing home:

From a home finance perspective, is it smart to look for an existing home in an area heavily populated with new construction?
New construction helps stabilize, and sometimes increase, prices for existing homes. Imagine you’re searching for a house and find a brand new home for $300,000 and an older home for $225,000 in the same neighborhood. Unfortunately the new home is out of your price range, but the older home is in beautiful condition and you’ll stay within budget if purchased. In real estate investment strategy, you don’t want to be the biggest or highest priced house in the neighborhood. Buying the older home is a smart financial move because you’re buying at the low end of what the neighborhood has to offer.

What impact does new construction have on the value of older homes?
Many homeowners believe that their existing home is worth just as much as a new house if they share the same square footage, but new and existing home values are not going to be dollar for dollar. New construction homes will always be a bit more expensive per square foot, since they are fitted with the newest appliances, hardwares and technologies.

There will always be a market for new construction homes and existing homes. New construction exists for two reasons: Buyers want a custom home, and there is a shortage of existing houses on the market. We’re seeing a shortage of houses right now in the metro Detroit area and builders are filling the need by building the homes that buyers are looking for. However, buyers who aren’t looking for custom homes and want something a little cheaper will consider, and most likely buy, an existing home.

Is it risky to buy a home in an unfinished neighborhood?
Generally speaking, it’s not risky, but there could be downsides. If a neighborhood has been unfinished for a few years and a new developer begins building smaller or lesser quality homes, this can negatively impact your home’s overall value. However, purchasing in an unfinished neighborhood can be an advantage. Most developers start building homes at a base price and will significantly raise the prices as the neighborhood gets built out. If you were one of the first buyers and purchased your home at the original base price, your future neighbors might be purchasing a home in your neighborhood for the new, more expensive base price a few years later. Assuming that the homes are of similar quality, you have yourself a great deal and equity.

Have a question about the value of your home? Contact our team of professional lenders for more information.