Lexington Market Review 2022/2023

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Summary

New construction is a significant portion of the market especially when compared to nearby towns. While it is only 13% of the total market (down from 15% in 2021), it accounts for 45% of the over $2 million price range. Given that most of the new construction homes are built on the site of existing homes – teardowns – it has a significant impact on the under $1M price range by making it more difficult for home buyers to purchase “attainable” priced homes.

We saw a reduction in the number of new construction homes sold in 2022 to 41 homes. Whilst the number of homes sales declined overall in 2022 by 17%, the number of new construction home sales declined by 31%. At 41 home sales, 2022 is the lowest level seen since 2018.

Key question is why has the new construction market seen such a sharp decline in home sales? First, the average price of new construction homes has risen sharply in the last 2 years. In 2020 the average price was $2.14 million, by 2022 this had risen to $2.92 million, an increase of 36% which, when considering the homes square footage, was essentially the same size of home. Second, even given the strength of the luxury market in terms of home sales there is a limit on how many buyers are able, or willing, to pay over $2.5 million. Given the number of $2.5+ million homes that remain unsold at the end of 2022 shows that between 50-60 homes sales per year should be considered a high watermark for over $2.5+ million price range.The reason we saw such a sharp decline in new construction home sales was because developers built more homes over $2.5 million, and the market simply could not accommodate this many. Had more new construction homes been built below the $2.5 million price point the overall number of home sales would have been significantly higher.It’s interesting to compare new construction price appreciation to off-market teardown appreciation. New construction price appreciation grew at approximately 36% since 2020 yet the average price developers paid for off-market teardowns has remained static over this same period.Given the low price appreciation of off-market teardowns when compared to the overall market and especially the dramatic increase in new construction home prices seen in recent years, it is clear why developers see Lexington as a very profitable town in which to build.

Home Sales

The number of new construction homes being built in Lexington has risen steadily since the downturn in 2009 – many would argue because Lexington has a more relaxed implementation of zoning regulations than nearby towns. Clearly long-time Lexington builders, and increasingly out of town builders, see Lexington as a very profitable town in which to build.

The number of new construction homes decreased in 2022 to 41, after reaching highs of 58 and 60 homes in 2020 and 2021 respectively. In 2022 70 new construction homes were listed, 35 in January-June and 35 in July-December. Whilst 68% of the homes listed in January-June sold in 2022, only 28% of the homes listed July-December sold in 2022. This leaves many new construction homes either on the market or, after cancelling in 2022, about to come back on the market in early 2023. This will inevitably lead to downward pressure on prices. As we write this in January 2023 there are 36 homes on the market in total, 24 (67%) of these are new construction. Also, 24 (or 67%) of these 36 homes are over $2.5 million. With 10 new construction homes cancelled in the last 3 months and a new set of homes coming on in 2023 we predict that there will continue to be an over-supply especially at the higher price points.

Sale Price Distribution

There has been a shift in the sale price distribution of new construction homes since 2019. In 2021 and 2022 there were no new construction homes below $1.5 million. In Lexington, new construction condominiums are now selling at around $1.4 million. The data shows the major shift in the $1.5 million – $2 million and $2 million to $2.5 million price ranges. These price ranges dominated new construction in 2020. By 2022 the $1.5 million – $2 million had essentially disappeared and $2 million – $2.5 million declined from 16 sales in 2021 to 8 in 2022.

But and here is the reason for the over-supply, in 2022 the number of homes sold in the $2.5 million – $3 million price range remained relatively static at 35 homes. Approximately 50% of these homes were new construction. Of the 36 new construction homes listed in 2022 in the $2.5 million – $3 million price range less than 50% actually sold.

Off-Market Teardown Analysis

As we have stated previously, in 2020 the average price was $2.14 million, by 2022 this had risen to $2.92 million, an increase of 36% which, when considering the homes square footage, was essentially the same size home. It is interesting to plot the average new construction sale price against the off-market teardown price. The data confirms the often-quoted rule-of-thumb of the rule-of-thirds. Approximately a third for acquisition, third for build, and a third for profit. But, in 2021 and 2022 the rule was progressively broken – new construction prices rose 36% but the off-market teardown price remained the same.

It should be noted that the reason that there were so few off-market teardowns in 2022 was that a large number of new construction homes remained unsold. We count teardowns when a new construction home sells not when it is listed. Were it not for the oversupply in the luxury (and therefore new construction) markets the number of teardowns would have been considerably higher.