Home Construction in Your Neighborhood: Good or Bad for Your Home Value?

If you own a house, you probably have a love-hate relationship with new housing construction. Too much in your specific neighborhood can dilute the value of your home. Too little in general, though, may be a sign that the housing market overall is weakening.

You may be ambivalent anyway. You would like to be welcoming to new neighbors, but who needs the noise and disruption of construction activity on your street? As for the economics, gauging the impact of new construction on existing housing stock can be very tricky. Below is a discussion of some local and national considerations involved. What could be at stake is the ultimate sale price of your home, your ability to get a home equity loan, or the value of home equity lines of credit available to you.

Welcome to the Neighborhood?

At the very least, new building in your neighborhood is a sign that people are willing to invest in the area – a much better sign than when a neighborhood is littered with foreclosures and hollowed out by more departures than arrivals. However, too much of a good thing can be a problem. If an ambitious developer suddenly adds a 20-house tract to a quiet, 10-house street, it could tip the always-delicate supply and demand balance towards oversupply.

Then there are questions of whether your house will benefit or suffer by comparison with these newer units popping up nearby. Because potential buyers often start their research with crude financial comparisons of properties in the neighborhood, having more expensive homes built around yours can raise the perceived value of your property, and newer homes tend to be more expensive than older ones. According to the National Association of Realtors, the median sale price of an existing home was $197,900 as of the end of 2013. In contrast, US Census Bureau data put the median sale price of a new home at $270,200.

Then again, part of the apparent valuation lift that comes from new homes might be due to the fact that newer homes tend to be larger than older ones. Newer ones also have more modern fixtures and amenities, and this could make an older home suffer by comparison. This depends a fair amount on the features and condition of the homes themselves. Is the new house fresh and modern, or is it tacky and soulless? Is the old house classic and charming, or is it outdated and rundown? In any case, new houses nearby create quantitative and qualitative comparisons that affect the value of your property.

More Is Merrier: New Building = Housing Market Health

Beyond building activity in your specific neighborhood, new home construction should generally be seen as a sign of health in the housing market. Builders tend to have a feel for emerging market trends, so new home construction can signal which way the market is going. Notably, during the housing boom, new home starts peaked in early 2006, or roughly a year before new home prices peaked and started their long decline.

If more building is a good sign for the housing market, then what should homeowners make of a recent drop-off in new housing starts? December’s new housing starts were down 9.8 percent from November’s -- and that is after seasonal adjustment. However, month-to-month housing start figures can be a little erratic, and November’s figure was the highest in six years. So, it is too early to call December’s drop-off a declining trend in new home construction. However, December’s year-over-year increase in new housing starts was the slowest in over two years, so this is a statistic to watch carefully in the months ahead. The building recovery may not yet be headed south, but its upward trajectory seems to be leveling off.

From a macro standpoint, home owners should be encouraged by healthy growth in new home construction, because it tends to be a sign that home prices are rising. By the same logic, home owners should be wary when new home construction starts to weaken, as it may have done recently. Again, the ultimate sale price of your home might be in play, and even if you do not plan on selling in the foreseeable future, your home equity is at stake. Lenders keep careful track of valuation trends when determining whether to extend home equity loans and home equity lines of credit.

Ultimately, like most things involving real estate, the impact of new housing data comes down to local specifics. While the bigger picture is that new housing construction is a sign of health for the overall market, whether or not you should welcome new building in your neighborhood with open arms depends on how well the new homes fit in. This is a question of both the geography and aesthetics of the neighborhood, and of the supply vs. demand economics of your local real estate market.

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