The price premium on new-construction homes is dissolving. New home prices dropped in 30% of large U.S. cities last quarter

While new-construction homes have historically been more costly than buying an existing house, that trend is changing in some markets. Last quarter, year-over-year median listing prices for new builds dropped in 30 of the largest U.S. metros, according to an Aug. 7 Realtor.com report. 

Historically, the price-premium of new-construction homes has largely been driven by costly modern amenities and customization, rising materials and labor expenses; and strong demand for more housing. The median listing price for a new home in the second quarter of 2025 was about $450,000, while the median existing-home price was roughly $418,000, according to Realtor.com. 

But price drops have been prominent in the South and West as builders try offering more affordable options through incentives. Meanwhile, increased competition on existing homes and weaker buyer demand has driven down new-construction prices, according to Realtor.com.

“In a market still grappling with a shortage of nearly 4 million homes, affordable new construction plays a critical role in restoring balance,” Realtor.com Chief Economist Danielle Hale said in a statement. “Even with recent slowdowns in starts and permits, builders continue to deliver new homes to the market at a healthy pace.”

Although the overall home price for a new build is higher than an existing home, buyers can get a better price per square foot, Realtor.com data shows. Nationally, new builds typically list for about $218 per square foot, compared with $226.56 for existing homes, according to Realtor.com.

The top five markets where new-construction home prices dropped year-over-year last quarter, according to Realtor.com, include:

• Little Rock, Ark. (-15.6%)
• Austin, Texas (-8.5%)
• Wichita, Kan. (-7.9%)
• Jacksonville, Fla. (-7.8%)
• Cape Coral, Fla. (-7.4%)

Shrinkflation is also a factor at play making new homes more affordable in some markets. Builders are making homes smaller, and therefore more affordable, for new buyers. A July 2024 report from John Burns Research & Consulting showed about a quarter of new homes were downsized to cut costs. To make smaller homes more enticing and practical, builders have cut the number of hallways and increased flex space in the home.

“Instead of shrinking rooms to reduce overall home size, a common tactic among our architectural designers was to eliminate unnecessary circulation space,” JBREC wrote in its US Residential Architecture and Design Survey report. “Essentially, we’re Tetris-ing the functional rooms together, avoiding wasted square footage on non-functional areas like hallways.”

Builders offering incentives

To entice home buyers to go with a new home, builders are offering incentives like mortgage-rate buydowns and design upgrades to offset drops in demand from inflated costs. 

Devyn Bachman, chief operating officer with John Burns Research and Consulting, previously told Fortune these enticements were the “number one” driver for the rising new-home sales.

The mortgage-rate buydown, the industry term for discounted mortgage rates, is the most “desired and most effective” incentive offered in the new-home market today, she said. 

There are several types of mortgage-rate buydowns, including full-term buydowns and temporary buydowns. With a buydown, builders pre-pay the difference in interest between the market mortgage rate and the mortgage rate they’re offering. A full-term buydown would last the entirety of the loan, while temporary buydowns may last for only a few years. A May 2025 report from the National Association of Home Builders shows 61% of builders are using sales incentives like buydowns.

Buydowns are an enticing option for eager prospective homebuyers who are closely monitoring mortgage rates, but have been disappointed by the stubbornness of high interest. ICE Mortgage’s Monitor report for July showed more than 8% of borrowers financed homes with adjusted-rate mortgages (ARMs) or temporary buydowns last year, which reduced monthly payments in the first years of the loans. 

However, ICE Mortgage warned that “while these loans provide short-term relief, they may introduce future payment shock, particularly if interest rates remain elevated or reset higher.”