How the Fed’s rate cut could affect new home construction — and what it means for buyers

During the COVID-19 pandemic, low interest rates fueled a home-buying frenzy as the national housing supply struggled to keep pace. The result? Rising prices for existing homes coupled with record low levels of housing stock.

This shortage created an opening for new homes in the housing market to meet demand and offer modern conveniences, energy efficiency and customizable features.

“There is a clear and present need for new home construction to meet housing demand, and this construction is a significant contributor to overall economic activity,” says Joel Berner, senior economist at Realtor.com®, in September New Construction Report.

With that in mind, Realtor.com is introducing its Deal Days, a limited-time browsing experience starting in September. 18 to October. 6, designed to help anyone interested in buying a home find builder promotions and incentives – all in one place.

In July, some buyers were able to save up to $50,000 when buying new homes, thanks to incentives such as appliance packages and $10,000 toward closing costs.

Some regions of the US are hotspots for new construction, especially the South and West. In fact, in five states within these regions – “South Carolina, North Carolina, Idaho, Arizona and Florida” new construction homes have lower prices per square foot than existing homes, making them especially attractive to buyers budget conscious.

Here’s more on the state of new construction today, plus how homebuyers can save a bundle on a brand new home.

The condition of old and new housing

The number of houses for sale has been gradually increasing; but as of December 2023, the US still faces a shortfall of 7 million homes. Listing levels remain low because many homeowners are simply not selling (and then buying again) due to years of high mortgage rates.

Recently, however, mortgage rates have fallen to their lowest point in more than a year – and there is potential for further declines.

But here’s the catch: even if rates fall from the current 6% to 7% range, many potential sellers remain anchored to the extremely low rates they closed on a few years ago, making them reluctant to list homes theirs. This persistent gap means new construction remains critical in easing the housing crisis.

The Federal Reserve has issued its first interest rate cut in four years, kicking off a cycle of easing that will make new mortgages more affordable.

Fed policymakers announced a half-point rate cut on Wednesday, taking the central bank’s effective benchmark rate to around 4.8%, from a two-decade high of around 5.3%. It marked the first rate cut since March 2020 and follows two years of high interest rates in the central bank’s fight against inflation.

The half-point cut is more than quarters markets expected just a week ago and signals the Fed believes inflation has been beaten down and is now focused on preventing a recession and major job losses.

“The rate cuts will have a mixed impact on new construction,” says Berner. “On the one hand, buyers’ budgets will stretch, and new construction that was previously unaffordable for the marginal buyer will receive more attention than before. On the other hand, many homeowners with low closing fees have been waiting for a reduction in fees to list their homes, so we’re likely to see a flood of existing homes hit the market, creating competition for new construction

Resale prices go up, new construction prices go down

Once mortgage rates soften and homes come on the market, there will still be high home prices to consider.

“In August, the median listing price for a newly built home in the United States was $450,000, down slightly from July but significantly down from the peak of $470,000 in July 2022,” says Berner. “Existing homes, on the other hand, peaked earlier this summer and have been trending upward over the past two years, as they have historically.”

The median listing price for existing homes was $415,000 in June and fell to $400,000 in August.

Builders are turning to smaller homes

Builders are strategically addressing the affordability gap in the resale market, which has played a key role in stabilizing list prices this year.

One factor driving the downward trend in new home prices is that builders are focusing on smaller, more budget-friendly designs.

In 2022, the average size of a new building was 2,128 square meters, but by 2024, it had shrunk to 1,965 square meters.

Meanwhile, existing homes saw a slight increase in size, with the average rising from 1,770 square feet to 1,784 over the same period.

Another reason behind the decline in new home prices is the strategic use of builder incentives.

“Builders are in a great position to adapt to the market and they work with consumers to get cost relief in a variety of ways, including cashback options to help with down payments and reduced rates through lenders favorite,” says Cliff Johnson. vice president of New Homes and Rentals at Realtor.com. “Additionally, the long-term value of new construction is enhanced by buyer savings due to lower maintenance costs and lower utility costs for new construction. These factors combined make it a great time to buy a new home.â€

Where to find new construction

The South or West regions have the fastest growing overall housing levels for new construction.

While the inventory of existing homes has consistently followed the pre-pandemic period, new home listings there have steadily increased since 2022, according to Berner.

“In January 2024, there were 20.3% more new construction on the market than in January 2020,” he says. “In August 2024, this level reached 30.3%. On the other hand, there were 25.2% fewer existing home listings in January 2024 than January 2020.

This surge in new construction has created a number of opportunities for homebuyers, especially in states where new construction is not only more plentiful, but also more affordable than existing homes.

For potential buyers interested in purchasing a newly constructed home, the 10 states above offer the most new construction options that are more affordable and growing faster. If you’re interested in checking out new construction opportunities and promotions in your area, check out Realtor.com’s Deal Days builder promotions.