Should you build or buy a house?
With housing stock scarce across the country, many potential 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 a house or buy it?
Well, if you compare average build prices to average purchase prices, building your own is usually a bit cheaper. But there are so many variables that it's far from certain.
Wondering whether to build or buy in 2022? Here's what you should know.
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Is it cheaper to build or buy a house?
At the end of 2021, the U.S. Census Bureau's national median selling price for an existing home $416,900. And Realtor.com estimates that the average cost to build a home in the second half of this year was about $379,000, including excavation, permits, inspections, and other associated costs.
But these building costs exclude the price of the land you will be building on. Add that and you'll hardly notice the difference between building and buying.
Average construction costs for a house: $379,000 (excluding land) Average cost of buying a house: $416,900
So what is the right choice? That depends on many factors – such as your needs, location, schedule, local household inventory, and the availability and prices of materials and labor.
Let's explore these factors a little further so you can weigh the costs and benefits of building versus buying.
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Average construction costs for a house
As mentioned above, Realtor.com put the average cost of building a home at around $379,000 at the end of 2021. And that's before adding the cost of buying a property.
When land purchase is included, there is not a big gap between the average price to build and the average price to buy. And building could be significantly more expensive depending on location and blueprints.
There are many other variables that affect construction costs as well. Let's explore what that is.
House construction: cost variables
First, there are the construction costs. Not only can this vary greatly depending on the 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, there can be big savings. Just don't try to do work that is beyond your ability. There will be independent inspections and the home must be mortgageable to have a reasonable 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 it does in Kansas. And the costs in all other states range between these two extremes.
Other variables include:
The size of the house The build qualityMaterialsFacilitiesAppliancesFinishes
Forbes estimates that you can build a basic home for around $100 per square foot. Most pay around $150. But it's easy to spend $500 a foot when you want the best of everything.
And no doubt you could easily break that top number if you choose to import hectares Calacatta Carrara marble from Italy and antique fireplaces and doors from French chateaux.
Plan for overruns
Of course, some construction projects run on time and on budget. But it is very common for both to overflow. So plan a safety reserve of 5% or 10% to cover unexpected costs. And even more so if you're the kind of person who's easily tempted to overspend when faced with an array of choices.
Financing your house construction
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 job is done, you usually need to refinance the mortgage to pay back the bank or top up your savings. And that means two types of closing costs: one for the original home purchase loan and another for the refinance.
Meanwhile, home loans typically come with higher interest rates than standard mortgages. And there are strict rules on the schedule of construction and disbursement of funds.
An alternative is a home loan. With one of these, you borrow a loan to buy the land and build the house. And money is released when you reach preset building milestones.
For more information, see: Financial Steps to Building a Home: The Complete Guide
Average cost of buying a house
We found that at the end of 2021, the median selling price for an existing home was $416,900, according to the US Census Bureau.
But just as construction costs vary from state to state, so do home prices. In fact, there can be tremendous variation within states by city, county, and neighborhood.
For example, buy a home in Ilion, NY and you can expect housing costs to be about a third of the national average. But buy one in the Hudson Yards area of Manhattan, NYC and expect to pay dearly. According to the New York Times, the average selling price there was an astronomical $4,354,000 in the third quarter of 2021.
Home price inflation
There's another component to your decision-making process: how fast are house prices going up where you want to buy or build?
In December 2021, CoreLogic reported: “U.S. Annual home price growth remained strong in October at 18%, the highest in the index's 45-year history.” This is an annualized number, meaning that house prices in October 2021 were 18% higher than 12 months earlier.
And that's a national average. If this is your first time buying, the houses you want to live in may have risen more gently. But it's just as likely that they've skyrocketed even more.
For example, if you wanted to shop in Arizona or Idaho, CoreLogic says prices in both states rose more than 28% over that 12 month period.
This can influence your decision of whether to build or buy your home.
Consider your schedule
Should you be diverting some of your down payment savings into buying a property now? You could then sit on it until you can afford to start building. That way, you would have at least some of your housing costs under control. In fact, one could argue that you have one foot on the bottom rung of the apartment ladder.
So, to really answer the question, "Is it cheaper to build a house or buy one?", you have a lot of homework to do. In fact, you may not be entirely sure until you find the property you want, get estimates from contractors, and compare those costs to similar existing homes in the neighborhood.
Check the eligibility of your home loan. Start here (01/19/2022)
Buying a new home versus an existing home
There is one more option. And that means buying a new-build home: one that's just been built, but you didn't build it yourself. This strategy also has advantages and disadvantages.
In 2017, Trulia estimated that homebuyers paid about a 28% premium when buying a new home.
So, it could cost you $512,000 to buy a new home comparable to an existing $400,000 home ($400,000 + 28% = $512,000). This percentage is unlikely to have changed all that much since 2017.
Trulia's article was headlined, "What You're Paying For That New Home Smell." And it's true, the smell is pleasant, as is the prestige that a new home brings. Better still, you probably have the latest in everything: technologies, finishes, construction techniques and more.
House guarantees and other savings
There are also solid financial benefits to owning a new home. For example, you are much less likely to face unexpected and expensive repairs.
And if you do, these defects may be covered under the manufacturer's warranty. NOLO, a legitimate website, suggests that such guarantees generally provide the following protections:
One year for labor and materials Two years for mechanical defects (air conditioning, electrical, heating and ventilation systems and plumbing) Ten years for structural defects in the home
Of course, if you hire builders to build your own new home, you'll need to negotiate guarantees with them.
So you save on home repairs by buying new. But there may be other financial benefits as well. They typically have better insulation than an older home and may have more energy efficient systems and appliances. And all of that should result in lower electricity bills and help you do your bit for the planet.
True, it's difficult to assign dollar values to your probable savings. But you should consider them when answering 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 have examined the general principles of buy-versus-build competition. But what are the differences between the current economy and the real estate market?
This article was written during the ongoing Covid pandemic, when predictions were even more difficult than usual. But here are some factors that might influence your opinion on whether it's better to build or buy a home in 2022 and beyond:
inventory shortage – There are simply not enough apartments available to meet the demand. And that probably won't change for years. Because the only way out of this mess is to build more houses. And it could take years or more than a decade to build enoughLack of manpower to build — 2021 was an unusual employment year. Some older Americans took early retirement. And a record number of young people left their jobs to start their own businesses. So the construction industry had a hard time building land and paying higher wages to attract workersOngoing material costs — The Covid-19 pandemic caused problems in the supply chain, leading to shortages of many products, including building materials. Take wood as an example. As of mid-January 2021, it was $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 continue to fall or rise in the near future? Only time can tell
This shortage of inventory has caused homebuyers to compete against each other, with most sellers receiving multiple offers above list price.
In this market, cash buyers often have priority. Your offers are not linked to financing. And they are treated as a safe bet, while those who need mortgages can be viewed as riskier. This is often true even when mortgage borrowers have been pre-approved by their lenders.
In areas where the housing market is particularly hot, some homebuyers have seen multiple — sometimes dozens — of offers being turned down. You can't blame many for being demotivated.
Maybe you are reading this because you are one of them. And you are now thinking of building your own home because buying it has so far proved impossible.
That may well be a smart move. But don't expect an easy ride. Building material prices could hit you hard (particularly with price hikes related to the pandemic and supply chain issues). And depending on where you live, you might find it just as difficult to attract a workforce as mainstream developers do.
Increasing home values for existing homes
Rising home prices are great for existing homeowners. In December 2021, CoreLogic reported that its "average annual equity gain of $56,700 per borrower for the third quarter of 2021 was more than three times the profit for the prior year."
In other words, the average homeowner's wealth increased by almost $57,000 in a single year without lifting a finger. What's not to like?
Well, a lot if you're a first-time buyer or someone who's sold their home and can't find a new one. Because your purchasing power is constantly decreasing – and fast.
The good news for such buyers is that many expect home price increases to slow dramatically in 2022. So while values should continue to rise, if the pundits are right, the worst of the skyrocketing prices could be behind us.
Building vs. buying a house: the conclusion
So is it better to build or buy a house? You are now much better informed about this topic than you were at the beginning of this article. But you probably won't get much closer to a decision.
That's because of all the variables we mentioned earlier, including:
Whether you have the skills and time to do some of the work yourself, the construction costs where you want to build, including possible labor shortages and price increases for materials, house price trends in the area you want to live in, the size and the specifications of the house you want, whether you' prepare to live in temporary housing while construction is complete. The type of mortgage you choose
Unfortunately, there is no definitive answer to the original question: is it cheaper to build or buy a house? The only way to find out is by calculating the numbers for your own unique situation.
If you know a local real estate agent and builder, you may be able to model your likely costs for both a theoretical purchase and a construction project, and then compare to see which is cheaper.
But other than that, you'll probably need to find land and get bids from contractors. Then you can compare the cost of the house you could build versus buying a similar product. Only with these you can make your final choice.
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