Millennials are entering their best income earning years, and that means many are now becoming homeowners. Millennials hold the largest share of the home-buying market, and Gen Z will soon not be far behind. But given the current economic environment, is buying an existing home the best option, or is it better to build a new one? This article breaks down the pros and cons for each option, taking into consideration how quickly you need to move into a house, your tolerance for risk, and how much you can afford. Ultimately, the right answer will depend on your individual situation.
Buying a House in 2022
Houses have gotten more expensive since the COVID-19 pandemic, due to a range of issues from the resulting fallout. One of the best ways to see this upward trend is to measure housing affordability by comparing housing costs to income people have. For that purpose, the graphic above shows the price-to-income ratio for the period from 2015 to 2022 (2015=100). If we compare the latest data to 2019 data, housing has gotten roughly 26.7% more expensive through Q1 2022 as a proportion of income. It was on a steady upward trajectory until the pandemic hit, when it temporarily dipped before taking off like a rocket. According to the Federal Reserve Economic Data (FRED), the national median sales price of existing-homes rose to $440,300 in the second quarter of 2022, making the houses 40.7% more expensive than in the first quarter of 2019. The graphic below shows the median house sale prices in the United States since 2015.
There are lots of reasons why the price keeps going up. First off, in general the US has a housing shortage, and this problem is spreading from coastal cities to the rest of the country. Second, the pandemic pushed the economy into a new era of remote work where people can work from home. This means people want more space, driving up the square footage for homes and their prices. Some places even pay tech workers to relocate and work remotely. And third, location is one of the most important factors in determining the price for real estate. There are only so many homes in good school districts with plenty of access to amenities.
And on top of all this, mortgage rates exploded over the last several months. Historical rates from Freddie Mac show average 30-year fixed interest rates ended 2021 at 3.10%. In June of 2022, rates hit 5.52%. A mortgage for the same house became several hundred dollars per month more expensive, just because the cost to borrow the money went up.
Pros of Buying a House in 2022
- Housing prices are high, but they are still going up. It will probably get more expensive to buy a home next year.
- Owning a home allows you to build equity over time, one of the best ways to accumulate wealth.
- Mortgage rates are high based on recent history, but still below the topline inflation rate.
- Buying an existing house will let you move in a lot faster than building a brand new one, typically 30 to 60 days after getting an accepted offer.
Cons of Buying a House in 2022
- It’s extremely competitive, and may require you to write a risky offer. This might include offers above asking price without inspection contingencies.
- It’s a lot harder to get what you want. In years past, houses for sale would sit on the market for several weeks. Although the market has slowed somewhat, it is still very common for the best houses to sell right away.
It’s easy to become fatigued and get burned out with the house-buying experience.
Building a House in 2022
A different option from buying an existing house is to build a brand new one. The average price to build a single-family house in the US is $358,800 for a standard build with mid-grade materials, garage, and deck.
The graphic above shows the Producer Price Index (PPI) for residential industry (services and goods). This index measures the average change over time in selling prices received by domestic producers of goods and services. We can see that new home construction costs were on a steady upward trajectory before exploding during the pandemic, costing 36.3% more for materials and 40.9% more for services and labor.
There are a few variables driving the increase in new home construction costs. Labor is hard to find as the US labor force participation rate remains below pre-pandemic levels. That drives up the cost of labor, which means higher prices for the finished products. And thanks to global supply chain issues, the final price for all the materials that make up a home now cost a lot more too. For example, lumber skyrocketed in 2020 and 2021 as mills shut down and demand for housing increased. Only lumber has added $14,345 to the total cost of a single-family home as of July 2022.
Pros of Building a House in 2022
- The house is brand new, is easier to maintain and retains its value longer than existing homes.
- You can get exactly what you want. The only person’s opinion that matters as far as design is your own, and you can customize as much or as little as you want.
- A new home is a healthy home. You won’t have to worry about hazardous substances such as asbestos in a brand-new home.
Cons of Building a House in 2022
- It takes several months to build a house, but even more in 2022, requiring you to have a lot of flexibility to wait.
- You can’t lock a mortgage rate today for a house that won’t be completed for a long time. The cost for your monthly payment will depend on the rates when you close.
- The price can also change throughout the build process. When developers purchase materials that cost more than they originally planned, they may pass that cost on to you.
- You should be prepared for extra costs, and delays caused by supply chain interruptions.
Other Costs and Considerations
There are a few other things to consider about the cost of building a new house. Depending on the development, the cost for the land might be a separate expense than the actual construction. That means it could cost more to clear and prepare a building site, not to mention securing the necessary permits. You may need to pay for utilities to be installed, and you may need to hire architects.
Financing a new home construction is more expensive than buying an existing home. You will likely need a construction loan for the builders’ operating costs. Because there’s more risk for a bank to loan money for construction, interest rates are higher for construction loans than mortgages. And once the house is built, a mortgage lender will require that the house appraise for at least as much as it cost to build. If an appraiser thinks the house would sell less than it cost you to build, you may be on the hook for the difference. And what’s worse, most banks will only lock an interest rate within 45 or 60 days of closing. You can pay extra for a longer bridger of 90 or 120 days, but that also costs more money out-of-pocket.
Build vs Buy a House: The Bottom Line
Is it better to build or buy a house in 2022? The bottom line is that it depends on the specific situation. It can be significantly cheaper to buy an existing house than to build a brand new one. You can also close faster and reduce the risk of rising mortgage rates. Land prices vary by location, which can make the cost considerably higher in some areas. On the other hand, building a custom house can sometimes be less expensive because you don’t need to invest the money in renovating to meet your needs.If you’re in a position to wait and cost isn’t an overriding factor, the appeal of a brand new home which you can personally help design is hard to beat.
Chris has a PhD in economic history and works in the financial services industry. He has an experience writing about personal finance, and he recently built a new house in the Midwest.