While home prices are increasing, recent research shows buyers’ expectations don't necessarily align with current prices. According to the National Association of Home Builders’ Eye On Housing blog, 38% of buyers expect to pay less than $250,000 for their next home, and 19% expect to pay less than $150,000. However, this may be unrealistic for most buyers as just 5% of home starts in 2023 were priced below $250,000. The median price of a single-family home started in 2023 was $425,000. About 95% of these homes were priced at $250,000 or more, and about 37% were priced at $500,000 or more.
Part of the explanation may be that the lower end of the market is differentially served by existing homes. However, there are limits to how well existing homes can satisfy the demands of prospective buyers with modest incomes. As previous posts have noted, the supply of existing homes has been running at historically low levels for several years and prices of existing homes have been setting record highs. Indeed, the median price of an existing home in May was well over $400,000.
Another large part of the explanation for the actual vs. expected price mismatch is the cost of new home construction. Builders know that a potential market exists for new homes priced under $150,000; they just can’t build homes at such a low cost.
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