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New construction is a significant portion of the market especially when compared to nearby towns. While it is only 18% of the total market (up from 13% in 2022), it accounts for 50% 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 $1 million price range by making it more difficult for home buyers to purchase “attainable” priced homes.

We saw an increase in the number of new construction homes sold in 2023 to 50 homes (41 new construction homes sold in 2022). As noted in other sections there were many new construction homes build in 2022 that remained unsold at the end of the year. In 2023, developers were forced to discount those homes and so the average price of new construction homes declined in 2023, the sale price to list price ratio decreased to below 100% and days on the market doubled to 80 days.

It’s interesting to compare new construction price appreciation to off-market teardown appreciation. New construction price appreciation grew at approximately 33% since 2020 yet the average price developers paid for off-market teardowns has remained static over the same period.

Given the near zero 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.

New Construction Home Sales

The number of new construction homes increased in 2023 to 50, 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 left many new construction homes either on the market or, after cancelling in 2022, coming back on the market in early 2023. This oversupply led to downward pressure on prices as developers were forced to reduce prices to sell the already completed homes. As we write this in January 2024 there are 24 homes on the market in total, 18 (75%) of these are new construction. Also, 20 (or 84%) of these 24 homes are over $2.5 million. With 8 new construction homes cancelled in the last 3 months of 2023 and a new set of homes coming on in 2024 we predict that there will continue to be an over-supply of new construction homes, especially at the higher price points. 

Sale Price to List Price Ratio

The dramatic drop in the sale price to list price ratio to an average of 94% was, as detailed above, caused by the 2022 over build and developers having to reduce prices in 2023 to sell their homes.

Sale Price Distribution

There has been a shift in the sale price distribution of new construction homes since 2020. 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 under $2 million and $2 million to $2.5 million price ranges. These price ranges dominated new construction in 2020. By 2022 the under $2 million had essentially disappeared and $2 million – $2.5 million declined from 16 sales in 2021 to 8 in 2022.

The increase in the number home sales in the $2 million to $2.5 million price range in 2023 was caused by two effects. Firstly, developers reducing prices from above $2.5 million to under $2.5 million (50% of the increase) and secondly buyer confidence in Q1 and Q2 when the majority of sales occurred, before the rise in mortgage interest rates in Q3 and Q4.

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.

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