As a Realtor and investor for 10 years I often create my own theories of various market trends based on my own observations, experiences and listening to the anecdotes of others. I have formed opinions on questions like:

Do new construction homes or older/existing homes appreciate more?
Do fee simple homes tend to appreciate at a faster or slower rate than condominiums? Why?
Do new units nearby increase your property value and/or rent?
Which amenities included in a Home Owners Association or Condo Owners Association provide a good value to the owners because of economies of scale? And which increase the probably that your fee paid will be squandered.

When clients have these sorts of questions I of course share my opinion and state them as opinions. When an interesting questions recurs often enough, I research, but when I can’t find existing research I do my own analysis. This post addresses the first question above through my own research: appreciation of new construction versus older/existing homes.

Scope & methodology

Out of Scope: I have found lots of articles on the pros and cons of buying a new vs existing home. The properties themselves are often different, maintenance costs are different, purchase prices are different, utility costs are different, etc. Comparing the pros and cons of purchasing the 2 home types is not my aim here.

In Scope: The change in the sales price of new construction homes from when they were first sold after construction to when they were sold subsequently versus the change in sales price for existing homes over the same period. In the interest of time I limited my search to Montgomery County MD and Loudoun County VA homes that were sold in 2017 and sold again in 2022.

Methodology: I pulled all the homes that fell into the scope defined above from Bright MLS. I realize that many new construction homes and some existing home listings are never entered into the MLS, but I don't see that affecting the high level results I'm shooting for. In total I sampled 152 homes that met the criteria. I manually looked at all of the listings in order to find and exclude homes with significant improvements. Significant improvements excluded were homes that after the 2017 sale were torn down and built new, large renovations, additions added, extensive deferred maintenance addressed. 16 of the 152 homes were excluded leaving 136 to further analyze.

Obviously there is some subjectivity in determining which homes had ‘significant improvements’. Generally by looking at the listing pictures and reading the remarks I wanted to weed out properties that you could say had $5k-$10k of capital improvements invested into them between when they were sold in 2017 and then sold again in 2022. It occurred to me that the reason I have not been able to find any research on this topic is probably because of this subjective nature and time consuming attribute of this weed out process.

Without further ado, my findings

New construction homes that were bought in 2017 increased in price by 28.3% when they were resold in 2022. Stated another way, on average those properties increased 5.7% annually (using simple interest). Existing/older homes increased by 37.6% over the same period, or 7.5% annually. New construction homes missed out on 9.3% of home appreciation. In my sample the average sales price for the new construction homes when sold in 2017 was $699.3k. Consequently, on average the new construction homebuyers’ equity balance was $65.0k less than if their home would have appreciated like an existing home.

As detailed in the chart above the difference in the appreciation rates was much more exaggerated in Montgomery Co. than in Loudoun Co.

Making sense of the results

The results weren’t shocking to me. It makes sense that the purchase price of something brand new will demand a premium. No matter how well maintained, the quality of being brand new no longer exists once it has been lived in. It’s not uncommon for a buyer client ‘X’ to only be considering new construction homes. I’ve yet to have a client that is categorically excluding new construction so let’s say that client ‘Y’ is considering both types of homes. New construction homes have demand from ‘X’ and ‘Y’ and existing homes only from ‘Y’. Greater demand drives a greater price, Econ101 right?

As noted above there are many other considerations in deciding between a home that is new or existing. Whether or not the other benefits of new construction outweigh this diminishment of potential appreciation could be the topic of another post.

Deeper dive and feedback

I’d be super interested to hear from folks on this topic. Are the results about what you expected? Have you read anything else that supports my small sample findings or to the contrary? What was your experience buying new construction, how did it appreciate or depreciate? What other related topics have you wondered about?

At some point I'd like to dive deeper into this same question. Analyze a bigger geographic area over a broader time period. Also it would be interesting to control for attributes such as 1) condo vs. fee simple and 2) modest vs. midrange vs. high priced homes. The limiting factor was that each listing needs to be manually considered and that Bright MLS limits me to exports of 5,000 lines at a time. In total I downloaded about 80,000 lines of data just to do this small sample analysis.

I hope you found reading this as interesting as I did creating it.

- Jeremy

Washington, DC

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