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2017 Sees Surprising Rise in Sales of New Homes — What This Means for Insurers

by Precise Leads

November 29, 2017

The recent rise in sales of new homes creates further opportunities for insurance agents.

Buoyed by low mortgage rates and a strong job market, sales of new homes skyrocketed in October, according to recently released statistics from the Department of Commerce. The agency tallied a seasonally adjusted annual total of 685,000 new homes sold in October, a rise of 6.2% and the highest level reached since the same month in 2007. October’s strong showing marked three consecutive months of increased new home sales.

It wasn’t only new home sales that rose. Sales of existing homes were also higher than expected in October, as the National Association of Realtors (NAR) recorded a 2% hike to a seasonally adjusted annual rate of 5.48 million units sold. 

Prices Rise, Too

The median price of a new home sold in October rose 3% from a year ago to $312,800, while the average price landed at a record high of $400,200. If the pace of sales continues on the current track, the available supply of new homes will be depleted in 4.9 months, a decline from September’s estimate of 5.2 months. A six-month inventory of new homes indicates a favorable supply-demand balance.

New home sales strengthened across the country, even in the hurricane-ravaged South, where sales accelerated by 2% to hit a 10-year high. As for existing home sales, the NAR reported that sales remained weak in South Florida in October, despite signs of a rebound in Houston and Jacksonville, Florida. Throughout the South, existing home sales edged up 1.9% in October.

The Northeast, meanwhile, experienced a 30.2% surge in new single-family home sales in October. Likewise, purchases of new homes in the Midwest rose 17.9%. The Western U.S. posted a rise in new home sales, but to a lesser degree than the Northeast and Midwest.

Even more encouraging is the number of homes sold either before or during construction. The Commerce Department estimates that 247,000 homes were bought in October that had yet to break ground, up from 184,000 in the previous month. Another 221,000 were sold while under construction.

Quicken Loans Executive Vice President Bill Banfield told HousingWire.com that the market for new homes should remain strong, though prices will likely rise. “Given the increase in the number of properties sold in which construction hadn’t yet started, we should feel confident that residential building will accelerate in coming months,” he said. “That said, the high average selling prices pose a hurdle for younger homebuyers entering the market for the first time. A stable job market and sustained low mortgage interest rates continue to increase property prices.” 

Impact on Home Insurance

Insurance agents, of course, have ample opportunity to sell new policies with the recent surge in sales of new homes. Any clients who purchase a newly built home will typically pay a lower premium, since these “smart” structures feature up-to-date security and sprinkler systems, newer and safer building materials, as well as connected devices that detect dangers such as water leaks, all of which bring down homeowner insurance rates. Dwellings constructed of brick also qualify for reduced premiums because they’re considered less flammable than homes made of wood.

Whether new or older, a homeowner insurance policy must cover the cost to rebuild. And since 60% of homes in the U.S. are underinsured, according to CoreLogic, insurance agents should ensure their clients’ homes are fully insured in the event of a disaster.

If a home is severely damaged or destroyed, a homeowner insurance policy can fund the entire cost to repair or rebuild. That replacement cost, however, may change over time as building material becomes more expensive and labor expenses rise. For extra protection, your clients can add an inflation clause to cover those increased construction charges.

Another option is to underwrite the homeowner insurance policy based on market value, or the price a buyer would be willing to pay for the house in its current condition. Market value takes into account factors beyond the house’s estimated replacement cost such as proximity to schools and the community. For an older home that would be difficult to replicate in today’s marketplace, a market value policy would be advisable. But one of the risks of a market value policy is that the purchase price may be lower than the cost to fully rebuild.

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