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New Rules For The New-construction Market

Another change that comes with an improving construction market is the amount of incentives builders are offering. Not that long ago, builders were throwing in everything from new appliances to brand-new cars to get buyers in the door. Now, according to industry sources, these incentives are beginning to disappear as the market continues to improve.

Stephen Melman, director of economic services with the NAHB in Washington, D.C., says incentives have "backed down from the peak. It's not quite as many and the value of the incentives isn't quite as great." For instance, builders may offer some additional items that the buyer will appreciate but don't cost too much, such as an upgraded cabinet or a bit of landscaping.

Another interesting change has been the increase in the size of new homes. A recent survey from the American Institute of Architects' (AIA) found that: 8 percent of surveyed architects said they are building larger homes than they were last year. "This is significant because it represents a reversal of a trend that has been going on for six years," said Kermit Baker, chief economist for AIA in Boston.

Martha Finkley, senior manager with national homebuilder KB Home in Los Angeles, agrees, saying in an email that the average square footage of their new homes has increased over the last couple years. The average square footage of KB's new houses in Sacramento alone has gone up 24 percent in two years.

Financing new construction

Most banks offer what's known as a construction-to-permanent loan, which allows buyers to finance both the construction costs and the mortgage itself. During the construction period, the loan is typically interest-only and has a slightly higher interest rate than a standard mortgage.

Typically, lenders dole out the funds for construction to the builder in a series of installments over the construction period. The lender will make periodic inspections to ensure the construction is done properly.

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