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Why buy used when you can buy a new home for less?

Builders these days are being forced to discount new home prices so heavily that it’s actually cheaper — at least in some pockets — to buy new than used, Hovnanian Enterprises CEO Ara K. Hovnanian said Dec. 19 after the Red Bank, N.J. builder announced a net quarterly loss of $469.3 million or $7.42 a share.

Hovnanian confirmed something reported on Nov. 20: the premium traditionally paid for owning a new home is reversing in favor of existing homes in parts of Southern California, Florida, Las Vegas and other overbuilt markets. Interestingly, Hovnanian says that new home sales will pick up if sellers of existing homes drop their prices. He reasons that those sellers need to unload their existing homes before they can buy new ones.

Here’s what Hovnanian said, according to a transcript of the company’s Dec. 19 conference call with analysts:

We’ve tried to illustrate that historically new homes … were priced higher than equivalent existing homes, represented by the dashed blue line [referring to a slide]. However, homebuilders have lowered prices on their new homes much more dramatically than existing home owners have been willing to lower prices on their homes. The public builders in particular have lowered prices dramatically to move inventory. Now things are backwards, with new homes selling at a discount to existing home levels.

We believe that when market analysts speak of the corrections that need to come in home prices what they’re really focused on are the existing home prices and their need to lower their prices similar to what the homebuilders have done with new home prices over the last 18 months. The widely discussed Case-Shiller Index tracks changes in existing home prices and this can often be misleading and confusing. As existing home owners move prices to be competitive with prices of new homes there’s likely to be more sales activity for everyone as potential home buyers must often sell an existing home to buy a new home.

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