Is It Cheaper to Build or Buy a Home?

Lumber, labor and concrete costs for new home construction are currently approaching record highs in the United States. At the same time, interest rates are at record lows, supply is bottoming out and home prices are sky high. A powerful sellers market such as this leaves prospective homebuyers in an unprecedented bind. Some are convinced that purchasing a pre-existing home is their only path to ownership while others feel that custom home construction is the best path.In a country where construction and purchase prices are increasing month-to-month, determining which position to take can be incredibly difficult. Each buyer’s individual situation calls for a different approach. For instance, a family hoping to house their elderly in-laws might be better served by a custom-built home. On the other hand, a young couple relocating for work would be best served by a pre-built home due to time constraints. Follow below to learn whether it is cheaper to build your house or to buy one and which option is best for different types of homeowners.

Housing Prices in Today’s Market

Initially, prospective buyers assumed purchasing a home in the United States would be easy and affordable when interest rates were lowered significantly by the Federal Reserve. However, rising materials costs, a short age of new homes and an abundance of prospective buyers quickly transformed a sluggish housing economy into a booming sellers market.

Median Sales Price for a Single Family Home in the US in 2021

In his article “January 2021 Existing-Home Sales Annual Pace Rises to 6.69 Million” for The National Association of Realtors, Michael Hyman noted that the median home price across the US had skyrocketed compared to 2020. According to Hyman, the median sale price of a home in the US in January 2021 was $303,900, compared to $266,300 at the same time last year. This disparity was most apparent in the Western US, with a median sales price difference of $64,200 between January 2020 and January 2021.

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By April, the disparity between median home sale prices in 2020 and 2021 had outpaced previous records. Kaitlynn Copinger explained in her May 2021 article “Here’s How Much Money You Need to Build Your Dream Home” for Homelight. According to Copinger, by April 2021 the median price of a single family home in the United States was nearly $330,000 “according to April 2021 data from the National Association of Realtors (NAR).” Given these numbers, Copinger writes that “it might seem cheaper to do it yourself.”

Buying a Home in California in 2021

In the state of California, the housing market is even more competitive, placing prospective buyers in a continuous state of panic. In his February 2021 article “Southern California home prices, sales jump 13% in January” for The Los Angeles Times, Andrew Khouri noted that “Southern California home prices and sales jumped by double digits in January from a year earlier.” As of January, Southern California’s median home sale “price rose 13% from a year earlier to $599,500 last month.”

According to Khouri, “January marked the fifth consecutive month in which sales increased by double digits” in Southern California. January was also the “sixth straight month that saw a double-digit increase in the median price” in the southern half of our state.

Demand and Sales Prices Show Know Sign of Slowing

Since the first quarter of 2021, home prices in California have exploded far beyond what was expected. According to the California Association of Realtors, California’s median home price “broke $800,000 in April.” In a May 2021 follow-up article for The LA Times, Jack Flemming noted that “Southern California home prices muscled to an all-time high in April as the hot real estate market got even hotter.” At the time, Flemming wrote that Southern California’s “median home price increased 20.2% year over year to arecord $655,000.” This increase was “$25,000 more than the previous median price record set in March” and far beyond that of January's record. Neither demand from buyers nor record listing prices from sellers shown signs of slowing down in Southern California.

Cost to Build a Home in the US in 2021

Over the last several months, lumber, steel, concrete and labor prices shot up across the country due to major shortages caused by supply chain disruptions worldwide. In mid-June, the bubble finally burst and costs began to plummet. Inhis June 2021 article “Lumber Prices Are Finally Dropping After They Soared During The Pandemic” for NPR, Joe Hernandez wrote that“lumber prices skyrocketed to historic highs during the coronavirus pandemic.” This sharp increase was “fueled by a demand for new homes and a surge inrenovations and DIY hobbyist projects by those of us on lockdown.” After enduring months of “wild price swings,” builders and home buyers have finally returned to their initial project budgets and timelines.

Cost of Construction Materials Continues to Fall Precipitously

Writing for Fortune in mid-June, Lance Lambert agreed with Hernandez. Lambert wrote that “lumber prices are headed back down—fast.” In the second week of June, “the cash price per thousand board feet of lumber fell $211 to $1,113.” This fall represented a 27% decline from an all-time high of $1,515 inlate May. Steel and concrete prices have also dropped in recent weeks as supply chains have come back online post-COVID. In early July 2021, existing homeprices are still sky-high while construction costs are actively falling. This makes a serious case for building your own home rather than purchasing anexisting built property.

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Current Cost to Build a New Home in the United States

In her May 2021 article “How Much Does it Cost to Build a House” for Homelight, Kaitlynn Copinger wrote that “in certain situations, it could be less costly to build than to buy.” Referencing Home Advisor stats from earlier this year, Copinger noted that “the average cost to build a new home in 2021 [was]$297,953.” Today, the median sales price of an existing single family home in the United States is approaching $330,000. Recent articles dating to April, May and early June in 2021 have failed to take into account the recent decline in materials costs across the US. As mentioned above, the costs of steel, lumber and concrete have finally begun to fall. This would likely lower the median cost of building a home below Copinger’s May 2021 estimate.

Why It Could Be Cheaper to Build a New Home than Buy an Existing Home in California

In California, this is even more likely to be the case, especially as inventory of existing homes is extremely low. Though the market might have calmed down a bit in the Golden State, homes are still more expensive in California than in nearly any other region of the US. In her article “California’s Red-Hot Real Estate Market Cools Just a Bit” for The New York Times, Debra Kamin warns buyers not to get too excited. Kamin writes that while stats did not sky rocket, they did not fall either. According to Kamin, the median home price in California “hit yet another record high in May.” Year-to-year home sales fell slightly and “the median number of days that a single-family home...held steady.”

Though the number of home sales fell, this could simply be due to a lack of inventory-- not a lack of interest. In his 30 June 2021 article “The Hottest Housing Markets In California In 2021” for Forbes, Andrew De Pietro elaborates. According to Pietro, “available inventory has taken a hit” across California. In Fremont -- a city in the East Bay of the San Francisco Bay Area of California -- inventory dropped “nearly 40%, from 208 homes for sale last May, down to 125 homes by end of May 2021.” The number of interested buyers, however, appears to be sustained. Clearly, the California housing market remains intensely competitive.

Costs to Consider When Buying an Existing Home

Inher article “What are the costs associated with buying a home?” for Bankrate, Jennifer Bradley Franklin outlines a series of unexpected costs of buying a house. Franklin writes that prospective buyers should “factor in additional expenses, such as closing costs, insurance and taxes, before committing to a mortgage.” In addition to their down payment, home buyers will also have to pay closing costs. Jennifer Bradley Franklin notes that closing costs typically cost buyers between “2 percent to 5 percent of the loan principal.” Common closing costs include an “application fee, appraisal fee, credit check fee, origination or underwriting fees, title insurance, title search fees and transfer tax.” In a hot sellers market like that in California in 2021, homebuyers could be on the hook for additional cash incentives and more closing costs than are typical for buyers in a softer market.

Piled on top of property taxes, closing costs and a hefty down payment are HOA fees, HOA fees and the cost of “maintenance, repairs and utilities.” In markets where competition between buyers is fierce, prospective buyers often waive contingencies intended to protect their interests. Though not always the case, waiving contingencies often results in unanticipated costs and labor. Those who waive inspection contingencies could be looking at significant repairs down the road. In short, writes Franklin, “the costs of buying and owning a home can add up quickly, so it’s important to prepare.”

Which Type of Homeowner is an Existing Home Right For?

1. People who are relocating for a job
2. People with a tight budget
3. People who cannot secure construction financing
4. People without special needs
5. People who love historic homes

Homeowners who could benefit from buying a house are those who must relocate for work orfamily, are operating on a tight budget or who cannot secure financing. Families without specific needs -- such as an ADU for in-laws or widened doors for a mobility-challenged family member -- might also buy a house. Those who love historic homes, have a passion for remodeling or are invested in a particular neighborhood might also choose to buy a house instead of building.

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Costs to Consider When Building a New Home

Inher article “How Much Does It Cost To Build a House—and Is It Cheaper to Buy or Build?” for Realtor.com, Margaret Heidenry outlines what to expect when building a new home. According to Heidenry, the preliminary costs of building a home include purchasing a plot of land, hiring an architect and engineer, applying for permits and securing materials. Next, prepping the site for the build could be costly too. Excavation, leveling, soil testing and more could be required.

Adding utilities hookups could run up a tab over ten thousand dollars, depending on your area. Each of these costs could be diminished by hiring a design-buildfirm as they handle the entire process from foundation to finishes under a single contract. Mechanical planning and installation (e.g. plumbing and electrical) are two additional costs. Interior finishes and landscaping also tack on a few extra zeros. Building a custom designed home in California could cost as much as $800 per square foot of built area.

Which Type of Homeowner is a Custom Build Right For?

1. People without time constraints
2. People who view their home as a real estate investment
3. People who have specific needs
4. People who want to make passive income
5. People who know they will have to retrofit an existing home
6. People who care about the environment
7. People who want to rebuild after a natural disaster
8. People who plan to live in a high-risk disaster zone
9. People who have another home to live in during construction
10. People who are looking for an emotional connection to their home
11. People who want a healthier home

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Prospective homeowners searching for peace of mind might be best suited by building a house rather than buying a house. New constructions might cost more to build upfront, but they often cost less in upkeep. They also suit a wider variety of needs for each homeowner. For instance, the buyer might wish to establish apermitted granny flat to rent for passive income. Another homeowner might need custom-designed flooring, doorways or floor plans to accommodate a mobility difference. Building a new home ensures that each need is met. Building a home can also be healthier and safer than buying an existing home.  This is because a new construction will meet or exceed all recently implemented efficiency, health and safety requirement simposed by the state. To this point, those rebuilding after losing their home to a wildfire, earthquake, mudslide or other disaster in California would likely prefer a new construction. Hiring local home builders with expertise can mitigate these risks significantly. If you choose to build a house rather than buy, you have more control over design and execution.

Benefits of Building Rather than Buying a Home

Inher article “How Much Does It Cost To Build a House—and Is It Cheaper to Buy or Build?”for Realtor.com, Margaret Heidenry quotes real estate broker Michael Schaffer. Schaffer notes that “‘older home shave more wear and tear, which means certain things may need more maintenance—or, if they’re on their last legs.’” According to Schaffer,“‘ considerably less upkeep is one of the primary reasons to build your own single-family home.’” This is true not only because they are more efficient, but “because everything from major appliances to the HVAC system is new and under warranty.”

New Homes Are Healthier for Homeowners, their Pocket Books and the Planet

Writing for Investopedia, Jean Folger notes that building a new home could also be healthier for your family, for your bank account and for the environment. Folger writes that “older homes may contain asbestos, leadpaint, or mold.” However, custom built homes do not contain these outdated materials and can actually “be built with specific materials making it better for the environment.” According to principal architect Guy Burtt, those who choose to build a new home also have the option to “‘wire for future technology upgrades, such as home automation and solar.’”

This makes new builds more flexible for the future. In addition to protecting human and planetary health, building a new home can also protect a family’s investment. Jean Folger explains that “even though the upfront costs of building can be higher, it may be easier to recoup your investment.” Quoting Burtt once more, Folger writes that “‘a newer home is typically more appealing than an older home to most people,’” so you could make a tidy profit. Perhaps best of all, new builds offer a sense of accomplishment, satisfaction and emotional connection to homeowners.

Building a Custom Home Has Emotional Benefits

According to Folger, building a new house can also “lead to a level of satisfaction that you can't achieve through buying an existing home.” The Element Homes team elaborated on this in our recent blog post “7 Emotional Benefits of Building a Beautiful Home.” We noted that “personalized interior design actually supports mental well-being” while knowing there are no pre existing issues improves peace of mind.

There is No Straight Answer to Which Costs Less

In short, there is no straight answer to which costs less, but there might be an answer to which will be more meaningful and more suitable to your family. The status of the current housing market, where you live and what type of home you hope to live in all affect the cost of an existing home and the cost of a new build. For example, purchasing a pre-existing single family home in LA might cost less than building a new house in the short term. However, if you have to adapt the existing home to better suit your family and its needs through renovations or remodels, the total cost of buying a home could far exceed even the most luxurious custom build. A home that once cost $300 per square footcould balloon upwards of $800 after all is said and done.

Accessibility to your site will also impact these costs, though in different ways. For instance, an existing home situated some what off-the-grid in a remote region of California will likely cost less than a home in the heart of Los Angeles or San Francisco. Alternatively, building a new home in a remote part of California could cost quite a bit more than building in densely populated SoCal or the BayArea. In the latter case, lack of accessibility makes building more expensive while in the former case, lack of amenities makes buying less expensive. Though these are just a couple examples, they illustrate the fact that the cost difference between building and buying is subjective and ever-changing.

Building a Custom Home with Element Homes

As a local full-service design-build firm, Element Homes offers prospective homeowners the opportunity to build their custom home from foundations to finishings. With experience across California -- from Los Angeles to the Bay Area -- the Element Homes team is uniquely qualified to handle local builds. Team members understand the many challenges of building in the Golden State. They are well-practiced in designing homes that stand up to earthquake, wildfire, wind, ocean spray and flood damage. With Element Homes, Californians can build a brand new custom home that provides peace of mind and the proper lifestyle for their families. Get an idea of how building a house could cost by requesting a quote from our team in Southern California or Northern California.

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