Higher mortgage rates are exacerbating the already existing shortage of for-sale housing, making it increasingly difficult for homeowners to list their properties. According to Zillow, a staggering 80% of homeowners currently have mortgage rates below 5%. However, if these homeowners were to sell their homes and buy a new one, they would be faced with the highest mortgage rates in 21 years, at around 7%. This "golden handcuff" effect has resulted in a minimal supply of existing homes, leading to a surge in new home construction. Single-family starts have increased by 6.7% from June to July, and a quarter of homebuyers are now considering new construction, as per the National Association of Home Builders. With this trend in mind, it’s important to understand the cost of building a house and the various factors that can impact it.
The average cost to build a house from scratch in 2022 was $297,904, roughly $150 per square foot, according to Home Advisor. However, this is just an average, and the costs can range significantly depending on several factors. These factors include the materials used, the cost of labor in the area, the size of the home, and other location-specific variables. For instance, building a house in Kansas could cost as low as $200,000, while in New York, it could reach up to $600,000. The cost breakdown of home building includes construction-related expenses, which make up around 61% of the total cost, as well as site preparation costs, which account for nearly 18%. Other factors that can impact costs include the size of the house, local labor and material trends, the level of customization, permit and utility costs, and land costs.
The Impact of Mortgage Rates on Home Sales and the Rise of New Home Construction
The current shortage of for-sale housing has been further exacerbated by higher mortgage rates, discouraging homeowners from listing their properties. According to Zillow, a staggering 80% of homeowners have mortgage rates under 5%, but if they were to sell and buy a new home, they would face much higher rates of around 7%, the highest in 21 years. This phenomenon, known as the "golden handcuff" effect, has resulted in a minimal supply of existing homes and a surge in new home construction.
Home construction has experienced significant growth, with single-family starts increasing by 6.7% from June to July, and a staggering 18.5% from April to May, according to data from the U.S. Census Bureau. Additionally, a survey from the National Association of Home Builders reveals that a quarter of homebuyers are now considering new construction as an alternative to existing homes.
The Cost of Building a House
The average cost to build a house from the ground up in 2022 was $297,904, or approximately $150 per square foot, according to Home Advisor. However, this is only an average, and actual costs can range from $112,000 to nearly $484,000, depending on various factors. These factors include the materials used, labor costs in the area, the size of the home, and location. For instance, building costs in Kansas can be as low as $200,000, while in New York, they can reach up to $600,000.
Factors such as the size of the house, local labor and material trends, the level of customization, permit and utility costs, and land costs can all impact the total cost of building a house. Land shortages, for example, contribute to the rising cost of building a house, as developable land becomes scarce and more expensive, especially in areas with heavy zoning restrictions.
Building vs. Buying: Which is Cheaper?
Whether building a house is cheaper than buying an existing one depends on various factors, including the local housing market, home prices, and material, land, and labor costs. To compare the two options in a specific area, it is advisable to consult a local real estate agent who can provide insights into local pricing trends and connect buyers with local builders for quotes.
While building a house may have a higher upfront cost, it can offer benefits such as reduced maintenance work, energy-efficient structures, and customized designs. Older homes typically require more maintenance, which can lead to significant costs over time. Additionally, newer homes are often more energy-efficient, resulting in long-term savings on utility bills. Ultimately, the decision between building and buying depends on personal preferences, budget, and the specific needs and goals of the buyer.
Financing Options for Building a New House
There are various financing options available for those who choose to build a house. Cash is one strategy, but if that is not feasible, other options exist. Construction loans are short-term loans that cover the costs of construction, lots, and other expenses. Some lenders offer construction-to-permanent loans, which transition into a traditional mortgage once the home is completed. Home equity loans or home equity lines of credit (HELOC) are also an option, allowing homeowners to borrow against their existing home’s equity to finance the construction of a new home. Government loans, such as FHA and VA loans, offer low-interest rates and allow financing for construction as long as certain rules and regulations are followed.
Factors to Consider and the Bottom Line
When deciding whether to build or buy a home, several factors should be taken into account. Time availability is a crucial consideration, as building a home from the ground up can take a year or more. Personal preferences, such as specific design styles or layouts, can also influence the decision. Building a custom home allows for greater control over design, energy efficiency, and long-term savings. On the other hand, buying an existing home may offer immediate occupancy and fewer maintenance needs.
Ultimately, there is no right or wrong answer when it comes to homeownership. It is essential to conduct thorough research, compare options, and consult professionals, such as real estate agents and builders, to make an informed decision based on individual goals and budget. Whether building or buying, owning a home is a significant achievement and an investment in the future.
Takeaways:
- Higher mortgage rates have contributed to the shortage of for-sale housing, as homeowners are reluctant to sell and lose their low-rate mortgages.
- New home construction has surged as a result, with single-family starts experiencing significant growth.
- The cost of building a house varies depending on factors such as materials, labor costs, size, and location.
- Building a house may be cheaper than buying an existing one, depending on the local housing market and specific preferences.
- Financing options for building a new house include construction loans, home equity loans, builder financing, and government loans.
- Considerations when deciding between building and buying include time availability, design preferences, maintenance needs, and long-term cost savings.
- Thorough research, comparison, and professional advice are crucial in making the right decision for individual goals and budget.
Note: The article is based on information from the given source but has been rewritten in my own words.
