J.D. Souther initially wrote the chorus for the song. According to Souther, the band thought it sounded like a hit, but he did not know what to do with it. About a year later, he, Frey and Henley gathered together for the writing of Hotel California where he played the song for them, and the three then finished the song together.

Souther would later say that the song came about as a result of their "fascination with gunfire as an analogy", and added that "at some point some kid would come riding into town that was much faster than you and he'd say so, and then he'd prove it." He said: "We were just writing about our replacements. Similarly, Henley discussed the song's meaning in the liner notes of The Very Best Of:

“ It's about the fleeting, fickle nature of love and romance. It's also about the fleeting nature of fame, especially in the music business. We were basically saying, 'Look, we know we're red hot right now but we also know that somebody's going to come along and replace us — both in music and in love.
The song was rumored to be about Bruce Springsteen, who was gaining fame when the song was written, but Souther has denied that

Eagles' biographer Marc Eliot would also state that "New Kid in Town" captures "a precise and spectacular moment immediately familiar to any guy who's ever felt the pain, jealousy, insecurity, rage and heartbreak of the moment he discovers his girlfriend likes someone better and has moved on. He also suggests that it captures a more abstract theme of "the fickle nature of both the muse and the masses.

On Henley's first solo album, I Can't Stand Still, he references the song by singing the line, "there's a new kid in town" over the rideout of "Johnny Can't Read".