Rising Costs for Homebuilders Likely to Push Costs Up: A Guide

Are homebuilding costs going to drop in the next several months?

You would think that we'd begin to see price decreases as soon as the economy cools off from pandemic-related inflation.

You would think that. But reality has a way of surprising us. 

The US Census Bureau collects and analyzes data for single-family home construction costs and has an index that compares year-over-year prices for New Single-Family Houses Under Construction going back to 1964 based on building permit requests and building materials cost. 

Here’s the crazy thing: from 1964 through 2022, there are only three years that did NOT show an increase year-over-year: 2008, 2009, and 2010. That means that over the course of 57 years, 54 of those years saw overall increases in new construction prices. To me, that says the odds of prices for new homes falling are slim. 

Maybe if we go through another “Great Recession” like 2008, we’ll see prices come down, but that will be because nobody can afford a new home anyway. We’ll have bigger problems to worry about if that’s the case.

Prospective homebuilders aren’t asking the right questions.

The question about whether building costs and prices of new homes are going to come down is not the right question to ask. The right question is whether or not you’re comfortable investing the amount of money it takes to build a new home. That means assuming a level of financial risk.

My crystal ball says prices aren’t coming down. Of course, my crystal ball is about as accurate as yours or anyone’s, and if you don’t like what my crystal ball says, there’s always someone else’s.

If you look at history, the chances of costs actually dropping look pretty slim. Metros around the country are reporting a total increase in the value of new residential units, anywhere from 15 to 30%. But my guess is that they’ll level off long-term somewhat, so at least we’re not seeing those huge increases. 

So if the average cost to build is scaring you off, it might be in your best interest to explore what it takes to buy an existing home without the need to break ground. If you’re still interested in building on a plot of land, keep reading.

The Right Questions to Ask When Building Your Home

Whether or not to build a new home is a very personal decision. You have to weigh all sorts of variables. 

To me, one of the biggest is also the biggest unknown: how many breaths do I have left, and how do I want to spend them? Do I wait until the “perfect time,” which may never come, or do I make a rational decision about whether I can comfortably make the leap now into something I’ve always dreamed about for myself and my family?

When I was building new homes for sale, or “spec” homes as we call them, I would run worst-case scenarios for starting one or more new homes. My worst-case scenario formula would be based on my current typical costs to build and my monthly overhead.

I would then determine the following:

• How many months could I hold the home inventory?
• What would be the financial impact of cutting the prices far enough to get those homes sold in less than a month? 

Even if I had to cut prices to get the houses sold in a downturn, I would be willing to take the risk if the future income projection was worth it.

You can apply the same thinking to building a custom home.

I encourage you to apply this same worst-case scenario formula to building your own home. 

Based on the best information you have, what would be the worst-case scenario if you choose to have the new home built? 

Clearly the absolute worst-case scenario would involve losing your income or other assets, in which case it won’t matter whether you’re in your dream home or your currently built home — you have a problem either way. 

So, the risk of building a new home is that you won’t be able to afford the (probably) increased monthly cost of that new home. If you can afford it with your current income, meaning you’re comfortable with the investment based on your financial goals and other priorities, then the real risk is that your income declines. That’s the worst-case scenario you have to evaluate.

Turner & Son is Looking Out For You

To wrap up, the historical data suggests we won’t see a price decline, and if we do, it will be associated with an economic downturn that makes the question moot. We all have to decide for ourselves what our priorities are and make our decisions accordingly.

If you’re ready to stop looking at buying a home and start dreaming about building your perfect home, check out one of my favorite ebooks from our team called From Raw Land to Forever Home. 

It’s a resource we put out to help people just like you navigate the ins and outs of building a home, whether it’s dealing with construction loans or working with a general contractor. And the best part about it is that it’s free! Get your copy today.