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Should you build or buy a home?
With home inventory tight across the nation, many would-be buyers are considering alternatives — like building their own home from scratch rather than buying an existing one.
But that begs the question, is it cheaper to build or buy a house?
Well, if you compare average build prices to average purchase prices, building your own generally comes in just a little less expensive. But there are so many variables that that’s far from certain in every case.
Wondering whether to build or buy in 2022? Here’s what you should know.
Verify your home loan eligibility. Start here (Jan 19th, 2022)
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Is it cheaper to build or buy a house?
At the end of 2021, the U.S. Census Bureau put the national median sales price for an existing home at $416,900. And Realtor.com reckons the average cost of building a home in the second half of that year was about $379,000, including excavations, permits, inspections, and other associated costs.
But that construction cost excludes the price of the plot on which you’ll build. Add that on and you’ll hardly notice the difference between building and buying.
- Average cost to build a house: $379,000 (excluding land plot)
- Average cost to buy a house: $416,900
So, which is the right choice? That depends on a lot of factors — like your needs, location, timeline, local home inventory, and the availability and prices of materials and labor.
Let’s dig into these factors a little further to help you weigh the costs and benefits of building vs. buying.
Check your mortgage options. Start here (Jan 19th, 2022)
Average cost to build a house
As mentioned above, Realtor.com put the average cost to build a house at around $379,000 as of late-2021. And that’s before adding on the cost to buy a plot of land.
With the land purchase included, there’s not much of a gap between the average price of building and buying. And building could end up being substantially more expensive depending on your location and construction plans.
There are many other variables that will impact building costs, too. Let’s dig into what those are.
Building a house: Cost variables
First is the cost of construction. This can vary a lot not only by builder but also depending on the cost of materials where and when you want to build.
If you have the time and skills to do some of the construction work yourself, that might bring big savings. Just don’t try to do work that’s beyond your capabilities. There will be independent inspections and the home must be mortgageable to have a sensible resale value.
Then there’s the location.
Dave Ramsey’s website reports that it can cost more than twice as much to build in Alaska as in Kansas. And between those two extremes range the costs in all the other states.
Other variables include:
- The size of the home
- The quality of construction
- Materials
- Amenities
- Appliances
- Finishes
Forbes reckons you can put up a basic home for about $100 per square foot of living space. Most pay roughly $150. But it’s easy to spend $500 per foot if you want the best of everything.
And, no doubt, you could easily bust that top figure if you choose to import acres of Calacatta Carrara marble from Italy and antique fireplaces and doors from French châteaux.
Plan for overruns
Of course, some construction projects sail through on time and on budget. But it’s very common for both to overrun. So you should build in a 5% or 10% contingency to take care of unexpected costs. And more if you’re the sort of person who’s easily tempted to overspend when confronted with a range of choices.
Financing your home construction
Yet another variable is your financing plan. Some people use a mortgage to buy the land and then use savings or a construction loan to fund the project.
But then, when the work is finished, you’ll usually have to refinance the mortgage to repay the bank or replenish your savings. And that means two sets of closing costs: one for the original land purchase loan and another for the refinance.
Meanwhile, construction loans typically come with higher interest rates than standard mortgages. And there are strict rules about the timeline for construction and disbursement of funds.
An alternative is to get a construction-to-permanent loan. With one of these, you borrow using a single loan to buy the land and build the home. And money is released as you reach preset construction milestones.
For more information, read: Financial steps to building a house: The complete guide
Average cost to buy a house
We’ve established that in late 2021, the median sales price for an existing house was $416,900 according to the U.S. Census Bureau.
But, just as construction costs vary by state, so do home prices. Indeed, there can be enormous differences within states by city, county, and neighborhood.
For example, buy a home in Ilion, NY and you can expect housing costs that are roughly one-third of the statewide average. But purchase one in the Hudson Yards area of Manhattan, NYC, and expect to pay dearly. The median sale price there in the third quarter of 2021 was an astronomical $4,354,000, according to The New York Times.
Home price inflation
There’s yet another component in your decision-making process: How quickly are home prices rising where you want to buy or build?
In December 2021, CoreLogic reported, “U.S. annual home price growth remained strong at 18% in October, the highest recorded in the 45-year history of the index.” That’s an annualized figure, meaning home prices in October 2021 were 18% higher than they were 12 months earlier.
And, again, that’s a nationwide average. If you’re a first-time buyer, homes where you want to live may well have risen more gently. But it’s just as likely they’ll have shot up even more sharply.
For example, if you wanted to buy in Arizona or Idaho, CoreLogic says prices in both states rocketed by more than 28% over those 12 months.
That might influence your decision over whether to build or buy your home.
Consider your timeline
Should you divert some of your down payment savings into buying a plot now? You could then sit on it until you can afford to begin construction. That way, you’d have some control over at least some of your housing costs. Indeed, you could argue you have a foot on the bottom rung of the housing ladder.
So to truly answer the question, “Is it cheaper to build or buy a house?,” you’ll need to do a lot of homework. In fact, you may not be entirely sure until you’ve found the plot you want, obtained estimates from contractors, and compared those costs to similar existing homes in the neighborhood.
Verify your home loan eligibility. Start here (Jan 19th, 2022)
Buying a new home vs. existing home
There’s one more option. And that’s to buy a new-build home: one that was only just constructed, but that you didn’t have built for yourself. There are benefits and drawbacks to this strategy as well.
Back in 2017, Trulia estimated that homebuyers paid a premium of about 28% when they bought a new home.
So it might cost you $512,000 to buy a new home that’s comparable with a $400,000 existing home ($400,000 + 28% = $512,000). That percentage is unlikely to have changed all that much since 2017.
Trulia’s article had the headline, “What You’ll Pay for That New Home Smell.” And it’s true that the smell is nice, as is the prestige that a new home brings. Better yet, you’ll probably have the latest of everything: technologies, finishes, construction techniques, and more.
Home warranties and other savings
There are also solid financial advantages to owning a new home. For example, you’re way less likely to face unexpected and expensive repairs.
And, if you do, those defects may be covered by the builder’s warranty. NOLO, a legal website, suggests such warranties commonly provide the following protections:
- One year on labor and materials
- Two years on mechanical defects (air conditioning, electrical, heating and ventilation systems and plumbing)
- Ten years on structural defects in the home
Of course, if you’re using contractors to build your own new home, you’ll have to negotiate warranties with them.
So you stand to make savings on home repairs by buying new. But there can be other financial benefits. You’ll typically have better insulation than an older home provides and may have more energy-efficient systems and appliances. And all that should deliver lower utility bills, besides helping you do your bit for the planet.
True, it’s hard to assign dollar values to your likely savings. But you should take them into account when you answer the question, “Is it cheaper to build or buy a house?”
Is it cheaper to buy or build a house in today’s market?
So far, we’ve explored the general principles in the buy versus build contest. But what differences do the current economy and property market make?
This article was written during the ongoing Covid pandemic, when making predictions was even more difficult than usual. But here are some factors that might swing your take on whether it is better to build or buy a house in 2022 and beyond:
- Inventory shortage —There are just too few homes available to satisfy demand. And that’s unlikely to change for years. Because the only way out of this mess is to build more homes. And it could take years or more than a decade to build enough
- Shortage of labor to build — 2021 was an unusual year for employment. Some older Americans retired early. And record numbers of young people dropped out of employment to start their own businesses. So the construction industry has had a hard time putting boots on plots and paying higher wages to attract workers
- Current material costs — The Covid-19 pandemic caused supply chain issues that created shortages in many products, including construction materials. Take lumber as an example. In mid-January, 2021 it was down at $561 per thousand board feet. That tripled to $1,686 in early May. And by Christmas it had fallen back to $1,052. Will material prices keep falling or head higher in the near future? Only time can tell
Buyer competition
That inventory shortage has caused homebuyers to compete against each other, with most sellers receiving multiple offers above listing price.
In this market, cash buyers often get priority. Their offers are not contingent on financing. And they’re treated as a sure bet while those who need mortgages may be considered riskier. That often applies even if mortgage borrowers have been preapproved by their lenders.
In areas where the real estate market is especially hot, some homebuyers have seen several — sometimes dozens of — offers turned down. You can’t blame many for becoming demotivated.
You may be reading this because you’re one of those. And you’re now thinking of building a home because buying one has so far proved impossible.
That may well be a smart move. But don’t expect an easy ride. Prices of construction materials could hit you hard (especially with price hikes related to the pandemic and supply chain issues). And, depending on where you live, you may find it as difficult to attract labor as mainstream developers are.
Rising home values for existing homes
Rising home prices are great for existing homeowners. In December 2021, CoreLogic reported that the “average annual equity gain of $56,700 per borrower in Q3 2021 was more than three times the gain from a year earlier.”
In other words, the average homeowner’s wealth jumped by nearly $57,000 in a single year without their lifting a finger. What’s not to like?
Well, a lot, if you’re a first-time buyer or someone who sold their home and can’t find a new one. Because your buying power is reducing all the time — and quickly.
The good news for such buyers is that many expect home price increases to slow dramatically in 2022. So while values should keep rising, if the experts are right, the worst of skyrocketing prices could be behind us.
Build vs. buy a house: The bottom line
So, is it better to build or buy a house? You’re now much better informed on that topic than you were when you started this article. But you probably won’t be much closer to making a decision.
That’s because of all those variables we mentioned earlier, including:
- Whether you have the skills and time to do some of the work yourself
- Construction costs where you wish to build, including possible labor shortages and price hikes for materials
- Home price trends in the area where you want to live
- The size and specifications of the home you want
- Whether you’re prepared to live in temporary accommodation while construction is completed
- The type of mortgage you choose
Unfortunately, there’s no definitive answer to the original question: Is it cheaper to build or buy a house? The only way you can find out is by running the figures for your own unique situation.
If you know a local real estate agent and contractor, you may be able to model your likely costs for both a theoretical purchase and construction project, then compare them to see which is more affordable.
But, otherwise, you probably need to find a plot and get contractors’ quotes. Then you can compare costs of the home you might build with those for purchasing something similar. Only with those can you make your final choice.
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