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CLB Takes A Look At The Housing Momentum In The Midwest

How The Narrowing Price Gap Between New And Existing Homes Is Benefiting Builders.

The gap between new and resale median home prices has been a real drag on the Midwest for over a decade. Who knew a pandemic could create the perfect series of events to narrow that gap—and give the edge to new-home builders?

Shortly after the Great Recession, a price gap hovering around 60% to 70% was the norm for most major metros in the Midwest—from the Twin Cities to Chicago to Detroit to Indianapolis to Cleveland. Mature metros with aging existing home stock, little price appreciation, and expensive land and fees to build new really pushed that gap upward. It was closer to 20% pre-recession, making it much easier for new-home builders to effectively compete against the resale market. We have seen a steady but minimal decline in those price gaps over the past couple of years, but the onset of the pandemic accelerated the narrowing of that gap—much to the delight of Midwest home builders.

Rick Champine, area president for M/I Homes in Chicago, and his team are benefiting from the narrowing price gap. According to Champine, they're “finally seeing a rebound that appears to be meaningful since the Great Recession. Lack of supply both in resale and new-home construction is making the selling environment exceptionally strong. As a result, home values of current resales are beginning to rebound and narrowing the new/used price gap.”

Strong consumer demand, limited resale supply, historically low interest rates, and favorable demographics are in place as price appreciation is on the rise. Those dynamics have caused the price gap to narrow to less than 50% in most major Midwest metros.

Jamie Tharp, division president in Minnesota for PulteGroup, shares a similar sentiment to Champine. “As builders work to narrow the price gap between new homes and resale, home buyers have been more willing to pay the shrinking premium in exchange for getting exactly what they want in a home,” Tharp says. “In modern times, this has never been more important than it is now. Family homes have been transformed into schools and offices, and we’re discovering new ways we need our homes to work for us. Buyers desire and deserve complete satisfaction with their surroundings, and that’s a clear competitive advantage for new construction.”

The big question on builders’ minds is whether current momentum can continue in the Midwest? My response is absolutely, yes. As builders continue to pivot toward streamlined, functional homes on smaller lots, they are largely able to maintain selling prices even as building costs are increasing—keeping that price gap in check.

“We expect with limited used home supply, prices will continue to rise, and the gap will continue to narrow,” Champine notes. “As that gap narrows, our ability to clearly show the consumer the value of a new home will no doubt result in increased sales for us.”

Tharp adds, “We look to sell the value and attributes of new versus used, and paint the picture with all potential buyers that the total cost of a used home when factoring in energy efficiency, design, and life expectancy of materials makes that gap negligible. The heart of our largest generational group is preparing to buy their first homes. This is creating an enormous need for housing, which has challenged and incentivized builders to rethink and innovate their product offerings to reach more affordable prices.”

Flexibility and general support from local municipalities will be key in builders’ ability to continue to deliver attainably priced new homes to the market. Strong consumer demand is evident, with favorable demographics as a headwind. As a result, it’s time for the Midwest to shine.


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