Should you build or buy a house?
As home price inflation continues its upward trend, many potential buyers are considering alternatives, such as building their own home from scratch instead of buying an existing one.
But that begs the question, is it cheaper to build a house or to buy one?
If you compare average construction prices with average purchase prices, building your own home is often more expensive. But there are so many variables that this is far from true.
Wondering whether to build or buy in 2022? This is what you should know.
In this article (Continue to...)
- Build vs Buy
- Average construction costs
- Average acquisition cost
- New Construction vs. Stock
- today's market
Is it cheaper to build or buy a house?
As a general rule, it is cheaper to buy a house than to build it. On average, building a new home costs $34,000 more than buying an existing home.
The median cost of new construction in May 2022 was $449,000. By comparison, the median cost to purchase an existing home was $414,200, according to the latest available data fromNational Association of Builders(NAHB) and the United States Census Bureau.
- Average Home Construction Costs:449.000 $
- Average cost of buying a home:414.200 $
The cost of building a new home includes land purchase, excavation, permits, inspections, and other related costs.
However, the data shows a significant drop in costs for those who already have a lot to build on. A seperationNAHB Study, as of 2019, places the purchase price of a property at 18.5% of the total cost of a new construction. This reduces the cost of building a home to an estimated $365,935 for those who already own a lot.
So what is the right choice? That depends on many factors, such as your needs, location, hours, local home inventory, and the availability and prices of materials and labor.
Let's explore these factors a bit more so you can weigh the costs and benefits of building versus buying.
Average Home Construction Costs
NAHB calculated the median cost to build a home as of May 2022 at $449,000. This includes the cost of buying a property.
Taking into account the purchase of land, there is a difference of 8% between the average construction price and the purchase price. And construction could become significantly more expensive depending on location, construction plans, and material and labor costs.
What affects the cost of building a house?
First, there are the construction costs. This can vary greatly not only depending on the builder, but also depending on the material used and when you want to build.
You can build a basic house for around $150 per square foot of living space. But it's easy to spend $500 per square foot or much more if you want the best of everything.
If you have the time and skills to do some of the construction work yourself, you can reap big savings. Just don't try to do a job that is beyond your ability. There will be independent inspections and the home must be mortgageable to have a reasonable resale value.
Then there is the location.
HomeAdvisorreports that it can cost more than twice as much to build in Alaska as it does in Kansas. And between these two extremes are the costs in all other states.
Other construction costs to consider
Other variables in the construction process are:
- Location costs:Builders have multiple charges for the land, including building permits, water and sewer inspections, and architectural and engineering plans, to name a few.
- Stiftung:A new house with a basement increases the total cost. But even without one, you still pay for the excavation, foundation, concrete, and retaining walls.
- Structure and exterior finishes:These costs will not only vary based on the square footage of the home and floor plan, but you also need to factor in the price of building materials and labor costs (such as your general contractor and any subcontractors).
- Important home systems:This includes plumbing, electrical, and HVAC. Again, there are labor costs for plumbers and electricians.
- Interior:Don't forget the flooring, drywall, countertops, appliances, and other amenities in your custom home.
- Graphic:Landscaping, outdoor structures, decks, driveways, and cleanup costs
You can build a basic house for around $150 per square foot of living space. But it's easy to spend $500 per square foot when you want the best of everything.
And there's no question that you could easily break that maximum number if you choose to import acres of Calacatta Carrara marble from Italy for your 5,000-square-foot home.
plan for cost overruns
Of course, some construction projects are executed on time and on budget. But it is very common for both to overflow. So, factor in a 5% or 10% rebate to cover unexpected construction costs. And even more so if you are the type of person who is easily tempted to overspend when faced with a variety of options.
Financing a new building
Another variable is your financing plan. Some people take out a mortgage to buy the land and then use their savings or abaudar firstto finance the project.
But then, when the job is done, you usually need to refinance the mortgage to pay off the bank or top up your savings. And that means two types of closing costs: one for the original home purchase loan and one for the refinance.
Meanwhile, home loans often have higher interest rates than standard mortgages. In addition, there are strict rules on the construction schedule and the disbursement of funds.
An alternative is a home loan. With one of these, you ask for a loan to buy the land and build the house. The money is released when you reach pre-set construction milestones.
For more information, see:Financial Steps to Build a House: The Complete Guide
Average cost of buying a home
In May 2022, the median sales price for an existing home was $414,200, according to the NAHB and the US Census Bureau.
But just as construction costs vary from state to state, so do home prices. In fact, there can be enormous variation within states by city, county, and neighborhood.
For example, buy a home in Ilion, New York, and you can expect housing costs to be 800% below the national average. But buy one in Chelsea, NYC and expect to pay dearly. ThatMedianAccording to information, the sale price there in April 2022 was an astronomical 2 million US dollars.Immobilienmakler.es.
house price inflation
There is one more component to your decision-making process. How fast are real estate prices rising where you want to buy or build?
In June 2022,CoreLogicreported that nationwide home sales prices “increased 20.9% year-over-year in April 2022 compared to April 2021.” This is an annualized number, which means that house prices in April 2022 were 20.9% higher than 12 months earlier. Additionally, no state reported an annual decline in home values.
This is also a national average. If this is your first time buying, property prices may have risen more gently where you choose to live. But it's just as likely that they've shot up even higher.
For example, if you want to shop in Arizona, Florida, or Tennessee, CoreLogic says that prices in all three states increased by more than 27% during that 12-month period. This may influence your decision to build or buy your home.
Consider your schedule
Should you divert some of your down payment savings to buy a property now? Then she could sit on it until she can afford to start building her dream house. That way, you would have at least some of your housing costs under control. In fact, it could be argued that you have one foot on the bottom rung of the apartment ladder.
So, to really answer the question of whether it's cheaper to build or buy a home, you're going to have to do a lot of research.
In fact, you may not be completely sure until you find the property you want, get estimates from contractors, and compare those costs to similar existing homes in the neighborhood.
Buying a new house vs. an existing house
There is one more option. And that means buying a new construction house, that is, a new house that was just built but you did not build it yourself. This strategy also has advantages and disadvantages.
In 2017,truliaestimated that homebuyers paid a premium of about 28% 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).
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 yet, you probably have the latest in everything: technologies, finishes, construction techniques, and more.
Home warranties and other savings
There are also solid financial benefits to owning a new home. For example, you're much less likely to face unexpected upgrades and expensive renovations.
If so, these repairs may be covered by the manufacturer's warranty.NOLO, a legitimate website, suggests that such warranties typically offer the following protections:
- One year on labor and material
- Two years for mechanical defects (air conditioning, electrical, heating and ventilation systems, and plumbing)
- Ten years for construction defects in the house
Of course, if you hire general contractors to build your own new home, you'll need to negotiate warranties with them.
This is how you save on home repairs by buying new ones. 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 electric bills and help you do your part for the planet.
It is true that it is difficult to assign dollar values to your likely savings. But you should consider them when deciding whether or not to buy or build a home is more expensive.
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 today's economy and the real estate market?
This article was written when global forces like supply chain issues and inflation were driving up construction costs when predictions were even tougher than usual. But here are some factors that could influence his opinion on whether to build or buy a home in 2022 and beyond:
- shred files: There simply aren't enough apartments available to meet the demand. This is likely not to change for years because the only way out is to build more houses. It could take years or more than a decade to build enough
- Lack of labor to build: 2021 and 2022 were unusual business years. Some older Americans have taken early retirement and record numbers of young people have quit their jobs to start their own businesses. So the construction industry had a hard time building land and paying higher wages to attract workers.
- Ongoing Material Costs: The Covid-19 pandemic caused ongoing problems in the supply chain, leading to shortages of many products, including construction materials. Let's take wood as an example. According to thatNAHB, "Extremely volatile lumber prices over the past year have caused the median price of a new single-family home to rise by more than $18,600." only time can tell
There are also challenges to consider in the existing real estate market.
Inventory shortages have caused homebuyers to compete with one another, with many sellers receiving multiple offers above list price.
In this market, cash buyers usually have priority. Their offers are not tied to financing. And they are treated as a safe bet, while those who need mortgages may be seen as riskier. This is usually true even if they have been mortgage borrowerspreviously testedfrom your lenders.
In areas where the real estate market is particularly active, some homebuyers have seen multiple, sometimes dozens of rejected offers. Many cannot be blamed for being unmotivated.
You may be reading this because you are one of them and now you are thinking about building your own house because until now buying one has been impossible.
That may well be a smart move. But don't expect an easy ride. The upfront cost of building materials could hit you hard (especially with pandemic-related price increases and supply chain issues). Depending on where you live, you may find it just as difficult to attract labor as the major developers.
Increase home values for existing homes
Rising home prices are great for existing homeowners. In June 2022,CoreLogicreported an average annual capital gain of $64,000 per borrower between the first quarters of 2022 and 2021. That's a 32% increase over the prior year.
In other words, the average homeowner's wealth increased by $64,000 in a single year without lifting a finger. What's not to like?
Well, a lot if it's a first-time homebuyer or someone who sold their home and can't find a new one. Because your purchasing power is steadily declining, and fast.
The good news for these buyers is that many expect home prices to rise.Slow down drastically in 2022. So while property values should continue to rise, if the experts are right, the worst of skyrocketing prices may be behind us.
Conclusion: build vs buy a house
So, is it better to build or buy a house? You are now much better informed on this topic than you were at the beginning of this article. But it probably won't get much closer to a decision.
That's because of all the homeownership variables we mentioned above, including:
- Construction costs where you want to build, including potential labor shortages and material price increases.
- Evolution of housing prices in the area where you want to live
- The size and specifications of the house you want
- If you have the skills and time to do some of the work yourself
- If you are willing to live in temporary accommodation during the construction phase
- 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 to calculate the numbers for your own unique situation.
If you know a local real estate agent and builder, you can model construction costs for both a theoretical purchase and a construction project, and then compare to see which is cheaper.
But other than that, you probably need to find land and get quotes from contractors. Then you can compare the cost of the house you could build with the purchase of a similar product. Only with these you can make your final choice.