New construction projects — homes, schools, hospitals, retail shops, roads and public transit options — inevitably impact the value of properties in nearby neighborhoods. The effects can be beneficial for one group and detrimental for another. Understand how new structures could push property prices in different directions.
Development Draws Interest
Real estate derives its value from development. While most swaths of land have inherent value, they mean little economically without infrastructure. They need industries and amenities to attract people and businesses. Regions, states, counties and towns follow this path to economic prosperity.
An excellent example is California. The Golden State used to be part of the Wild West and is now an economic powerhouse, recording a nominal gross domestic product of about $3.9 trillion in 2023. The Gold Rush spurred mass migration to the state, and the rest is history.
If you bought a property in Santa Clara County in the ‘50s or ‘60s and didn’t sell, your net worth today would be in the millions — thanks to the Silicon Valley boom.
Rising Housing Supply Pulls Home Prices Down
The acute and chronic housing shortage explains why property values in the United States have gone through the roof.
Logically, building more should drive down home prices since the additional supply would satisfy more demand. However, more housing doesn’t automatically translate into higher housing inventory.
Inventory can indicate whether buyers or sellers control a real estate market. This metric considers active listings and pending sales, excluding new builds meant for owner occupation or rent by definition.
The properties under construction meant for sale impact housing inventory differently. Building more middle housing options applies downward pressure to neighborhood property values more quickly than single-family detached homes.
However, most zoning ordinances and building codes keep population density in check, limiting housing supply in the suburbs. For this reason, new construction is unlikely to meaningfully cause local home prices to drop in a short period.
New Homes Drive up Existing Ones' Perceived Value
The availability of high-quality new builds can make neighborhoods more attractive. Existing properties can experience rapid appreciation because of the halo effect — a cognitive bias influencing people’s overall impression of something based on a single characteristic.
Interested buyers may feel compelled to put in more generous offers on the closest older homes to attractive new builds, which may fetch higher prices.
The halo effect can also backfire on existing properties. Some builders may rush construction to complete more housing units and generate more profits. Slapdash work results in low-quality new builds.
The Occupational Safety and Health Administration has slapped $364 million in penalties on the construction sector in 2023 to curb noncompliance. Only time will tell whether the rising penalties discourage more builders from cutting corners.
Complacency Offsets Gains From New Construction Projects
New construction can positively impact the market value of existing properties — but not their appraised value.
Appraisers make opinions of value based on the similarities of the homes being evaluated with recently sold local properties. The appraised value gap between existing older properties and high-quality new builds may not close if they only share geography.
Homeowners should modernize their houses to match the features of neighboring new builds. Otherwise, buyers would have a harder time convincing mortgage lenders to release more funds and end up paying larger down payments to close the deal.
New Construction Doesn’t Guarantee Home Appreciation
New construction projects can’t single-handedly influence home price movements. Analyze the interplay between the factors underpinning property appreciation and depreciation to navigate local real estate markets when new development is on the horizon.
Jack Shaw is a writer and editor for the lifestyle magazine Modded, as well as a car enthusiast and lover of nature. His writings on home design and renovations have been published on sites like CADdetails, A House in the Hills, House 2 Home Organizing and more. Feel free to reach out to me via LinkedIn.
