Dvaid vs Goliath In Today's Housing Market
Investor · Fort Lauderdale, FL · Member since 2013 · 917 posts · 606 votes
Dvaid vs Goliath In Today's Housing Market
2 Replies
- 7moEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 991 posts · 1k+ votes
Hello @Michael Carbonare,
This isn't an apples-to-apples comparison—what matters more than the property is the tenant segment the property attracts. Every market is different. I live in Las Vegas, so I'll compare new vs. resale single-family homes for ten-year cost, vacancy cost, and property tax.
Tenant Segment
New Homes
In Las Vegas, new single-family homes in desirable areas start around $550,000—largely because land costs exceed $1 million per acre. Few people can qualify for the monthly rent, and those who can typically stay only about a year before buying their own home. As a result, new single-family homes have shorter tenant stays and longer re-rental periods, typically about 3 months. The property tax rate for new homes is 1%.
The tenant segment we've targeted for 17+ years can only afford to rent single-family homes priced today between $350,000 and $475,000 (and typically in more convenient locations than new builds). Our average tenant stays over 5 years, and the vacancy rate for the 600+ investment properties we've delivered is less than 2%. Typical time to re-rent these properties is 1 to 1.5 months. The property tax rate for the resales we target is 0.55%.
Comparative Vacancy Cost
Below is the comparison data for a minimum-priced new home and the typical-priced existing home our clients buy.
New Home Resale Price $550,000 $400,000 Interest rate 3.99% (the rate you stated) 6% Average stay 1 Yr 5 Yr Time to re-rent 3 Mo 1.5 Mo Property tax rate 1% 0.55% Down payment 25% 25% Loan term 30 Yrs 30 Yrs New Home Ten-Year Cost
To keep the example simple I did not include insurance or maintenance.
- Debt service (P&I): $1,967/Mo
- Property Tax: $5,500/Yr (1% x $550,000) or about $458/Mo
- Total monthly cost: $2,425/Mo
- Vacancy cost:
- Turns/Ten Years: 10
- Months vacant: 3 Mo x 10 turns = 30 months
- Vacancy cost: 30 x $2,425/Mo = $72,750
Resale Ten-Year Cost
To keep the example simple I did not include insurance or maintenance.
- Debt service (P&I): $1,799/Mo
- Property Tax: $2,200/Yr (0.55% x $400,000) or about $183/Mo
- Total monthly cost: $1,982/Mo
- Vacancy cost:
- Turns/Ten Years: 2
- Months vacant: 1.5 Mo x 2 turns = 3 Mo
- Ten year vacancy cost: 3 x $1982/Mo = $5,946
(The vacancy cost comparison is $72,750 for the new home versus $5,946 for the resale. The cost difference of $66,804 ($72,750 - $5,946) is far greater than any likely maintenance cost difference.)
Additional consideration: You can refinance your loan if/when interest rates drop, but you cannot lower your taxes.
Conclusion
The lower interest rate on a new home is attractive, but it's not what matters most. What matters far more is the tenant occupying the property. If the tenant segment willing and able to rent the property doesn't perform—staying many years, paying rent on schedule, and taking good care of the property—you will lose a lot of money, even with the lower interest rate.
FERNWOOD Team, KW VIP Realty520 Reviews - 6moDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Quote from @Michael Carbonare:
Goliath? D.R. Horton, America’s largest homebuilder, advertising:
3.99% mortgage rate buydown
Up to $15,000 toward closing costs
Aggressive financing incentives in Northeast Florida
David? The individual homeowner trying to sell a 3-bedroom resale down the street.
Here’s the problem:
A homeowner can drop price. But the builder can:
Buy down the buyer’s rate
Cover closing costs
Offer design credits
Partner with a lender
Move inventory across dozens of homes at once
That’s not a fair fight. In today’s affordability-strained environment, monthly payment is king. And when buyers compare resale at 6.75% vs new construction at 3.99%, (with concessions), the math gets ugly.
This is why many resale listings are sitting.
It isn't condition; it isn't price; it IS financing leverage.
Builders can manipulate the payment.
Homeowners can’t.
So while headlines say “home prices are holding”, the real story is that individual sellers are competing against corporate balance sheets.
Goliath is slaying David.For the same square footage, in the same area, new homes average price is 40% higher than the average resale that’s at least 15 years old.
The numbers can be somewhat skewed as homes built 50years ago located in very desirable first ring neighborhoods within 5 miles of downtown and within walking distance of local attractions are going to be priced a lot higher than brand new drive till you qualify characterless subdivisions a 20 minute drive from the nearest exurbia shopping center.Further, some of the information you provide is technically incorrect. For example, you state “A homeowner can drop price. But the builder can:
Buy down the buyer’s rate
Cover closing costs
Offer design credits”Guess what? A homeowner can also buy down the buyers rate, cover closing costs, and offer design credits.
Your analysis is only valid in the circumstance where a person purchased a SFR recently in a newly developing area and paid a the same or higher price than builders are currently charging. Of course paying the going market price for any property will lead to loss if one needs to sell within a short period of time after purchase as (1) closing costs including broker fees, title fees, etc.), depreciation of the home usually about 2.5% per year (modified by any updating done), and an increase in interest rates (may cause seller to have to contribute to buyer closing costs in some price ranges) will lead to a 10% loss on total cost - which with having purchased with a 80% loan means loss of half the invested cash down payment.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.