Why are new homes cheaper than existing ones?
May 12, 2025
Unpacking a Post-Pandemic Housing Paradox
Something strange is happening in housing. Since the pandemic, in hot markets like Wake County, NC and across the sunbelt, brand new homes are selling for less per square foot than their older neighbors—sometimes dramatically so. Wake County saw an unprecedented 12% discount for new homes in 2024; Zillow Research found $200/sqft premiums for existing homes in some California markets.
This flies in the face of conventional wisdom. Construction costs are sky-high. Surveys consistently show a 60/40 buyer preference for newer homes, especially among millennials, the largest cohort of first-time buyers. If both costs and preferences point to a premium for new construction, why are we seeing a discount?
Using newly added historical sales data from HousingWeaver for Wake County, North Carolina (home to Raleigh and the Research Triangle – a microcosm of high-growth Sunbelt dynamics), we can unpack this puzzle. As America's third-fastest-growing large county since June 2020, its housing dynamics offer clues to broader trends.
The Weird Price Pattern Plunges
First, let's look at the historical context in Wake County. The price premium for new homes (per square foot) isn't static:
As Figure 1 shows, the new home premium steadily declined from 1990, neared zero during the early 2000s recession, and then climbed again post-Great Recession. But since the pandemic, the premium didn't just decline; it cratered, plunging into negative territory—reaching an average discount of 12% by 2024.
This plunge happened even as overall home values in Wake County exploded. The median home value hit $475,000 in 2024, up 51% from pre-pandemic levels from $315,000. So, the average home got much more expensive, while new homes somehow became cheaper relative to existing ones.
What's driving this?
Lets walk through three hypotheses:
Hypothesis 1: Supply Responds
The simplest explanation is basic economics: supply caught up with demand. Wake County dramatically ramped up housing production, permitting around 17,000 homes annually since 2021, up from a pre-pandemic average of 10,000. More supply should cool prices, or at least the premium for new builds.
The data supports this—to a point.
Figure 2 shows an inverse relationship recently: as new construction (in blue) surged post-pandemic, the price premium (in black) plummeted. Figure 3 confirms a strong negative correlation overall: years with more new builds tend to have lower new home premiums.
Figure 4 adds crucial nuance, showing how these factors influence each other over time.
So, builders did respond to market signals, ramping up production, which helped erode the new home premium. The market is working, sort of.
But this supply-side story hits a wall.
If increased construction were fully solving the market imbalance, overall prices (Figure 5) should moderate.
Instead, they continued their relentless upward march. The market is sending mixed signals: builders are closing the relative price gap, but the fundamental pressure driving overall prices higher remains.
Hypothesis 2: The Great Rate Divide—Builder Flexibility vs Homeowner Lock-In
To understand the new home penalty, we need to consider the seismic shift caused by interest rates.
Figure 6 shows the brutal reality of housing since 2020. The correlation between mortgage rates and home sales in Wake County is -0.90. That's practically economic law: for every percentage point rate climbed, about 200 fewer homes sold each month. Financing a $500,000 home jumped from $2,200 per month (at 3.25% in 2021) to around $3,200 per month (at 6.75% today), simply knocking legions of buyers out of the market.
As rates spiked in 2022, sales (blue) wobbled, but listings (green) cratered and stayed low. Why? The "lock-in effect." Existing homeowners sitting on ultra-low 3% mortgages looked at 7% rates and said, "No thanks." They stayed put, drastically reducing the supply of existing homes hitting the market. An existing home can only be sold if the owner moves.
Builders face no such constraint. They have no occupants to displace. And critically, during the low-rate frenzy, they built up significant financial muscle.
Figure 8 reveals that national homebuilder gross margins soared from a stable ~21% pre-pandemic to nearly 29% at their peak in 2022. This cushion gave them flexibility that individual homeowners lacked. As rates climbed and demand cooled, builders could deploy aggressive mortgage rate buydowns, price cuts, and other incentives to keep inventory moving. They could meet the market where it was. Existing homeowners, needing to buy their next home at those high rates, couldn't compete on price in the same way.
The result? Builders grabbed market share, jumping from ~25% of Wake County sales pre-pandemic to 36% post-pandemic. This flexibility explains how new homes could undercut existing ones. But it doesn't explain where this was happening most intensely.
Figure 9 shows the discount isn't uniform. While the average is -12.1%, many ZIP codes still see new homes selling at a premium. The rate story explains the ability to discount, but not the geographic pattern.
Hypothesis 3: Location, Location, Limitation
This brings us to the crucial role of geography. The story isn't just that Wake County built ~17,000 units/year, but where they built them. Land use, zoning, infrastructure, and costs dictate where shovels hit the ground.
First, let's map demand pre-pandemic using 2019 Price Per Square Foot (PSF) as a proxy.
Figure 10 shows demand concentrated in the pricier northwest-central corridor (darker blues, Quintiles 4 and 5). If builders simply followed the highest prices, that's where construction would boom.
But that's not what happened.
The building boom largely bypassed the most expensive areas. Only 6.8% of new homes were built in the top price quintile (Q5). In contrast, the two lowest price quintiles (Q1 and Q2) saw the most new construction (18.7% and 18.8%, respectively).
Builders went where land was likely cheaper and regulatory hurdles lower—the historically less expensive parts of the county.
Figures 12 and 13 visualize this geographic mismatch. There's a cluster of "Low Price, High Production" ZIPs (orange on map, top-left on scatter) and "High Price, Low Production" ZIPs (green on map, bottom-right on scatter). New construction wasn't primarily alleviating supply constraints in the highest-demand submarkets.
This mismatch is key to the price paradox. New homes are cheaper on average partly because they are disproportionately built in cheaper locations. An existing home in pricey Cary faces less direct competition from new builds in Cary (because fewer are built there) than from new builds further out, which aren't perfect substitutes.
Meanwhile, existing homes in those high-demand, low-new-supply areas benefit from scarcity and the owner lock-in effect, keeping prices high. New homes, concentrated in lower-priced areas and needing builder incentives to sell, pull the average new home price down. The "limitation" is real: building in established, desirable areas is hard due to land scarcity, zoning, and costs. Builders often choose the path of least resistance.
The Interplay Creates the Paradox
So, why are new homes cheaper than existing ones in places like Wake County? It's not one single factor, but the collision of three powerful forces in the post-pandemic economy:
- Increased Supply (Meeting Demand Unevenly): Builders responded to demand by increasing overall supply, which helped cool the relative premium on new homes, but not enough to stop the overall rise in prices.
- Interest Rate Shock & Market Segmentation: Soaring rates created a two-tiered market. Existing homeowners were locked in by low mortgage rates, restricting resale supply. Builders, armed with high margins from the boom years, had the flexibility to offer discounts and buydowns, capturing market share.
- Location, Location, Limitation: Crucially, new supply wasn't built where prices were highest. Land constraints, zoning, and costs pushed much of the new construction to historically cheaper, often peripheral, locations. This geographic mismatch means new homes, on average, are in less expensive areas than the existing housing stock they're compared against.