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Is it financially better to buy or build a house?

Is it cheaper to build or buy a house? As a rule of thumb, it's cheaper to buy a house than to build one. Building a new home costs $34,000 more, on average, than purchasing an existing home. The median cost of new construction was $449,000 in May 2022.

themortgagereports.com - Buy Or Build A House: What's Cheaper? | 2022 Cost Comparison

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Should you build or buy a home?

With home price inflation continuing its upward path, many would-be buyers are considering alternatives — like building their own house from scratch rather than buying an existing one.

But that begs the question, is it cheaper to build or buy a house?

If you compare average build prices to average purchase prices, building your own home is generally more expensive. But there are so many variables that this is far from certain in every case. Wondering whether to build or buy in 2023? Here’s what you should know.

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Is it cheaper to build or buy a house?

As a rule of thumb, it’s cheaper to buy a house than to build one. Building a new home costs $34,000 more, on average, than purchasing an existing home. The median cost of new construction was $449,000 in May 2022. Comparatively, the median cost to buy an existing home was $414,200, according to the most recent data available from the National Association of Home Builders (NAHB) and the U.S. Census Bureau.

Average cost to build a house: $449,000

$449,000 Average cost to buy a house: $414,200

The cost of building a new house includes buying a plot, excavations, permits, inspections, and other associated costs. However, the data reveals a significant drop in costs for those who already have a lot on which to build. A separate study from the NAHB, dating back to 2019, ballparks the purchase price for a plot to be 18.5% of the total costs for new construction. This bumps down the cost of building a home to an estimated $365,935 for those who already own a lot. So, which is the right choice? That depends on many 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 versus buying.

Average cost to build a house

NAHB put the average cost to build a house at $449,000 in May of 2022. That’s including the cost to buy a plot of land. With the land purchase included, there’s an 8% gap between the average price of building and buying. And building could end up being substantially more expensive depending on your location, construction plans, and the cost of materials and labor.

What impacts the cost of building a home

First is the cost of construction. This can vary a lot not only by the home builder, but also depending on the cost of materials and when you want to build. You can build a basic home for about $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, 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.

HomeAdvisor 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 building costs to consider

Other variables in the building process include:

Site costs: Home builders have multiple site fees, including those for building permits, water and sewage inspections, and architectural and engineering plans, to name a few Home builders have multiple site fees, including those for building permits, water and sewage inspections, and architectural and engineering plans, to name a few Foundation: A new home with a basement will increase the overall costs. But even without one, you’ll still pay for excavation, foundation, concrete, and retaining walls A new home with a basement will increase the overall costs. But even without one, you’ll still pay for excavation, foundation, concrete, and retaining walls Framing and exterior finishes: Not only do these costs vary depending on the square footage of the home and its floor plan, but you’ll also need to figure in the price for building materials and labor costs (such as your general contractor and any subcontractors) Not only do these costs vary depending on the square footage of the home and its floor plan, but you’ll also need to figure in the price for building materials and labor costs (such as your general contractor and any subcontractors) Major home systems: These include plumbing, electrical, and HVAC. Again, labor costs for plumbers and electricians also apply These include plumbing, electrical, and HVAC. Again, labor costs for plumbers and electricians also apply Interior finishes: Don’t forget your custom home’s flooring, drywall, countertops, appliances, and other amenities Don’t forget your custom home’s flooring, drywall, countertops, appliances, and other amenities Plot: Landscaping, outdoor structures, decks, driveways, and cleanup costs You can build a basic home for about $150 per square foot of living space. But it’s easy to spend $500 per square 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 for your 5,000-square-foot home.

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 building costs. And more if you’re the sort of person who’s easily tempted to overspend when confronted with a range of choices.

Financing a new construction home

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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. Additionally, 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. 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

In May 2022, the median home sales price for an existing house was $414,200 according to the NAHB and 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, New York, and you can expect housing costs that are roughly 800% less than the statewide average. But purchase one in Chelsea, NYC, and you can expect to pay dearly. The median sale price there in April 2022 was an astronomical $2 million, according to Realtor.com.

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 June 2022, CoreLogic reported that home sales prices nationwide, “increased year-over-year by 20.9% in April 2022 compared with April 2021.” That’s an annualized figure, meaning home prices in April 2022 were 20.9% higher than they were 12 months earlier. Furthermore, no states reported an annual decline in home values. Again, that’s a nationwide average. If you’re a first-time buyer, home prices 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, Florida, or Tennessee, CoreLogic says prices in all three states rocketed by more than 27% 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 on your dream home. That way, you’d have 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 of whether it’s 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.

Buying a new home vs. existing home

There’s one more option. And that’s to buy a new-build home, which is a new house 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). 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 newer 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 perks to owning a brand new home. For example, you’re way less likely to face unexpected upgrades and expensive renovations. If you do, those repairs 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 general 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 deciding on whether or not it’s more expensive to buy or build your own home.

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 as global forces such as supply-chain issues and inflation were pushing construction costs sky-high, 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 2023 and beyond: Inventory shortage : There are just too few homes available to satisfy demand. That’s unlikely to change for years because the only way out is to build more homes. It could take years or more than a decade to build enough

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: There are just too few homes available to satisfy demand. That’s unlikely to change for years because the only way out is to build more homes. It could take years or more than a decade to build enough Shortage of labor to build : 2021 and 2022 were unusual years 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 had a hard time putting boots on plots and paying higher wages to attract workers : 2021 and 2022 were unusual years 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 had a hard time putting boots on plots and paying higher wages to attract workers Current material costs: The Covid-19 pandemic caused lingering supply chain issues that created shortages in many products, including construction materials. Take lumber as an example. According to the NAHB, “Extremely volatile lumber prices during the past year have caused the average price of a new single-family home to increase by more than $18,600.” Will building material prices keep falling or head higher in the near future? Only time can tell

There are challenges to consider in the existing-home market, too.

Buyer competition

Inventory shortages have caused home buyers to compete against each other, with many 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 home buyers 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 your own home because buying one has so far proved impossible. That may well be a smart move. But don’t expect an easy ride. The upfront costs of construction materials could hit you hard (especially with price hikes related to the pandemic and supply chain issues). 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 June 2022, CoreLogic reported an average annual equity gain of $64,000 per borrower between the first quarters of 2022 and 2021. That’s a 32% increase from the previous year.

In other words, the average homeowner’s wealth jumped by $64,000 in a single year without them 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 home values should keep rising, if the experts are right, the worst of skyrocketing prices could be behind us.

Bottom line: Building vs buying a house

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 homeownership variables we mentioned earlier, including:

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 have the skills and time to do some of the work yourself 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 the cost of building 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.

themortgagereports.com - Buy Or Build A House: What's Cheaper? | 2022 Cost Comparison