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How location affects the cost to build a house

Location on map.jpg

If you're thinking of building a house, one of the first questions that probably comes to mind is, "How much is it going to cost to build a new house?" You've probably already figured out the answer: "It depends."

That's not really a useful answer, I know. So, let's break down the elements so you'll have a better understanding of how to predict the cost to build a new house. Knowing the cost can help you decide whether to pursue this option or whether to buy an existing house.

There are four main drivers of the cost to build a house:


  1. Location
  2. House plan
  3. Features / amenities
  4. Builder

In this article, we'll focus on why location is a key factor in the cost to build a house, and then we'll take a look at the other three factors in future articles.

Real estate agents have a saying: "Location, location, and location." Those are the three most important things in determining the value of real estate. When it comes to the ground your house is built on, that's absolutely true, but sometimes for slightly different reasons.

The first reason is the ever-present law of supply and demand. Building in a popular area will cost more simply because there is more demand for the labor and materials used in building. When that happens, the labor and materials essentially go to whoever is willing to bid up the price. Remember that it's the relationship between supply and demand that causes the price to go up or down, not the absolute number.

A high-growth, small market might have a higher cost to build than a low-growth, larger market. Several years ago the small town of Grove, Oklahoma, was one of the fastest-growing cities in the U.S. The cost to build in Grove was much higher than in Oklahoma City or Tulsa, even though the size of the town was a fraction of either of the bigger cities.

Other reasons location is a factor in the cost to build:


  • Distance from the closest urban center. If the land you plan to build on is a longer drive for the contractors, they'll charge more.
  • Sales tax. Some municipalities have higher sales tax rates than others. In Oklahoma, the sales tax the builder pays on materials varies from as little as 4.5% to as high as 10%. On the typical house, that can amount to around a $10,000 difference.
  • Rules and regulations. The local and state regulations have a huge impact on cost to build, because the more rules a city or state has surrounding building a house, the more the cost goes up. I know builders in heavily regulated environments where the cost to build the exact house I build in Oklahoma would be nearly twice as much.

 

As you begin looking at building a house, consider the impact that location will have on the cost. Identify what matters most to you in terms of location, and then determine if you can build a house within your budget in that area.

2 minute read