Buy vs. Build

[cosmie]

Disclaimer: Anything I say in this post is conjecture. I am younger and completely ignorant in the area of real estate, so please enlighten me rather than berate me.


In the current market, what is the economic feasibility of having a house built from scratch rather than buying a similar pre-existing one? Would there be any cost advantage of one over the other, or is it a wash (e.g. the cost of building a house will fluctuate to match the cost of buying one)? Can you get a mortgage on a house you want to build or must the house already exist?

Another (related) question I have: How correlated is a properties' value with the original cost of that properties creation (creation including the cost of labor, materials, and land)? For example, a newly-built house cost 400k pre-bust and dropped in value to ~250k post-bust. what would you conjecture the actual cost of that house's creation? Have the prices of houses dropped below their actual cost of production, or was the price of real estate so overvalued that such a drastic reduction was still above the cost of producing that house (e.g. the land itself was initially overvalued, not the house)?

If anything needs clarified, please let me know. :)


Edit: I ask, as I'm currently leasing. I'm not in any position to transition to home ownership anytime soon, but if it is economically feasible to build your own home, doing so when transitioning from renting seems like the best time.

[bdub]

The cost of a home is only partially related to the cost to build/rebuild the structure.   Depending on your location a small (to a very large) portion of a house value is the value of the land it is on (and the location of that land).  The actual home is a depreciating asset because it has a finite useful life.  This is why, typically, a new home will cost more than an existing home on an equivalent lot with an equivalent location ('equivalent' is difficult to quantify).  As they say, all real estate markets are local, but MY local market has seen the price of new homes come within 5-10% of existing homes due to the relative lack of elasticity in an individual home sellers price vs. what they paid (or perceived worth) and, a lack of good building land left. 

So, check out the options in your area because it could be more feasible to build OR more feasible to buy existing.

How is that for a non-answer?

[cosmie]

How is that for a non-answer?

That's actually very useful, to confirm what I otherwise thought. xD

I assumed most of the fluctuation was in regards to the land, rather than the building.

So, is the current cost of building a home (sans land) similar to the cost 5 or 8 years ago, adjusted for inflation? Or did the housing bubble also inflate the construction costs, and you can now build a home for cheaper than previously?


I'm sorry for these half-questions. I was perusing local housing ads when I saw a listing for a house built in 1960 and a house built in 2002, both with near identical listings: same size building (+- 50 sq. ft), same size lots, both off of smaller county roads (not in neighborhoods) just a few miles apart leading to the same arterial road, and both listed for almost the exact same price. It made me start thinking about the true cost of a house as an object, rather than the inflated cost of a house due to being "a house". Both of these properties were being valued as virtually the same worth, even though one had 50 years worth of depreciation and problems and one had 10 years worth. If that makes sense.

[AJ]

As a very general rule, it will be more expensive to have a house built than to buy one "used". That assumes you aren't doing anything yourself. It will be more difficult to finance construction, but only in the sense that you will need more down and they will require a solid work history. It is not uncommon to finance new construction, but it is less common that buying an existing house.

Besides land, another major expense related to home construction is going to be labor, which (I can only guess) has gone down somewhat with the bust putting a lot of contractors out of work.

I would probably not suggest building a home for a first-time homebuyer. It is certainly possible, and you can do whatever you like, but there are a lot of hoops and frustrations in home-ownership that you would do well to experience first. Any kind of construction (new home, or addition, or remodel) can be a very frustrating process.

If you have a particular layout of house that you are madly in love with and are absolutely sure you want to build your first home, that is one thing. If you are doing it because you are thinking it might be economically advantageous, or because it sounds like a "good idea" for transitioning into home-ownership, you may want to re-think it.

[arebelspy]

As a very general rule, it will be more expensive to have a house built than to buy one "used".

This.  And, due to the housing crisis, this is even more true than usual.  In some places houses are selling for well below replacement cost.

[cosmie]

I would probably not suggest building a home for a first-time homebuyer. It is certainly possible, and you can do whatever you like, but there are a lot of hoops and frustrations in home-ownership that you would do well to experience first. Any kind of construction (new home, or addition, or remodel) can be a very frustrating process.

I'm curious if you could expand on a few of these hoops and frustrations?

As for construction being frustrating, I'm already well aware of that. I spent most of high school living in a house that was perpetually in a state of construction (remodel and addition, concurrently). It was a nightmare. I didn't think that new construction would be as bad, though?

If you have a particular layout of house that you are madly in love with and are absolutely sure you want to build your first home, that is one thing.

That's actually the motivation behind this line of inquiry. For one thing, I love having a basement, and finished basements (or any basement at all) don't seem to be the norm here, looking at past listings. They've come up, but infrequently. As well, I've lived in 20+ places in the past ten years, and have acquired over the years a list of several useful traits/designs/features that seem absolutely brilliant in their use of space. If it weren't economically disadvantageous to build rather than buy, then I'd prefer having it designed how I liked rather than purchasing a pre-existing one.

If you are doing it because you are thinking it might be economically advantageous, or because it sounds like a "good idea" for transitioning into home-ownership, you may want to re-think it.

I didn't so much think it was economically advantageous to build instead of buy, but want to know if it was economically disadvantageous to do one vs. the other. As for being a "good idea" for first time home-ownership, I meant that it would be a better time than any, as you wouldn't have to juggle selling the current house with financing the new one since you'd be going from a simple monthly payment.

[cosmie]

As a very general rule, it will be more expensive to have a house built than to buy one "used".

In some places houses are selling for well below replacement cost.

This. This is what I was looking for. :)

[AJ]

I'm curious if you could expand on a few of these hoops and frustrations?

Everything takes twice as long and costs twice as much as you estimate. Something that you might think would be simple (such as having a light switch in a certain place, or using a certain breed of grass for the lawn) can turn out to be expensive and time-consuming. Things you thought you would want, and paid extra to have designed an built, turn out to not be useful in real life. At least with new construction you're not living with it like you were in the remodeling. There is probably a reason basements are uncommon in your area. I really wanted a basement, too, but I live in a wet climate where water tables are high, and basements are not practical.

As for being a "good idea" for first time home-ownership, I meant that it would be a better time than any, as you wouldn't have to juggle selling the current house with financing the new one since you'd be going from a simple monthly payment.

Well yes, that is true, but it will be true for your first home purchase regardless of whether you build or buy existing. And you can always sell your place first and rent while you build if you really want to avoid the hassle.

[bdub]

How is that for a non-answer?

That's actually very useful, to confirm what I otherwise thought. xD

I assumed most of the fluctuation was in regards to the land, rather than the building.

So, is the current cost of building a home (sans land) similar to the cost 5 or 8 years ago, adjusted for inflation? Or did the housing bubble also inflate the construction costs, and you can now build a home for cheaper than previously?

The cost of building a house also has the builders profit included.  Many builders are working on slimmer margins than before (esp. custom builders).  Also, materials were expensive because of the strong demand during the boom.  I think material costs are about equivalent know because their is a supply shortage as suppliers went out of business during the bust.

At least around here, the cost of building is lower because the builders are picking up land through bankruptcy, just like home buyers are able to pick up homes in foreclosure. 

 Both of these properties were being valued as virtually the same worth, even though one had 50 years worth of depreciation and problems and one had 10 years worth. If that makes sense.

It is very possible a 50 yr old house is in better shape than the 10 year old house.  Some people believe houses were built better 50 years ago.

[reverend]

Don't forget to look at houses that builders just built and are wanting to sell. Sure, they won't be exactly what you want with regards to layout and features, but you can sometimes make a screaming deal on them - and if they have the major features (LEED cert or whatnot) and are basic on the inside, then you can add dual flush toilets, crown molding and ceiling fans yourself.

[Mr Mark]

How is that for a non-answer?

That's actually very useful, to confirm what I otherwise thought. xD

I assumed most of the fluctuation was in regards to the land, rather than the building.

So, is the current cost of building a home (sans land) similar to the cost 5 or 8 years ago, adjusted for inflation? Or did the housing bubble also inflate the construction costs, and you can now build a home for cheaper than previously?

The cost of building a house also has the builders profit included.  Many builders are working on slimmer margins than before (esp. custom builders).  Also, materials were expensive because of the strong demand during the boom.  I think material costs are about equivalent know because their is a supply shortage as suppliers went out of business during the bust.

At least around here, the cost of building is lower because the builders are picking up land through bankruptcy, just like home buyers are able to pick up homes in foreclosure. 

 Both of these properties were being valued as virtually the same worth, even though one had 50 years worth of depreciation and problems and one had 10 years worth. If that makes sense.

It is very possible a 50 yr old house is in better shape than the 10 year old house.  Some people believe houses were built better 50 years ago.

In the current market you can buy homes well below replacement value. Let developers get into the build to rent market. Better to focus on solidly built properties in great locations wrt rent/value ratios.

And fully agree with bdub, the real long term investment of real estate is in the land, plus any rents from improvements. Remember a house needs to be looked after, & maintained. Taxes paid. Remodelled.

Yet a solid structured house with a good foundation, roof, plumbing & electrics can be cleaned up & modernised amazingly cheaply. (see MMM!) A lot of people can't see through superficial problems with a house or tell the difference between a money pit and a nice fixer-upper. Add a foreclosure and there's money to be made!

[WageSlave]

Yet a solid structured house with a good foundation, roof, plumbing & electrics can be cleaned up & modernised amazingly cheaply. (see MMM!) A lot of people can't see through superficial problems with a house or tell the difference between a money pit and a nice fixer-upper. Add a foreclosure and there's money to be made!

I agree with you 100%.  It seems to me though that the big selling points are always the superficial stuff---whenever you look at a place to buy, that's all they point out, is the "polish".  No one ever comments on the quality of the fundamental structure itself (and if you ask the realtor, you get blank stares).

How does one---such as myself, with virtually no experience---go about determining the quality of those expensive/hard to fix aspects of a house?  I.e., foundation, roof, plumbing, electrical.

Another thing I would add to that list is (depending on your area) a basement de-watering system.  We rent the house we're in now, but for the first couple years, whenever there was a big rain, the (finished!) basement would take on a lot of water.  The landlords were nice enough to install a de-watering system.  I don't know how much it cost them (I'm guessing $20k+), but it would have been effectively free to do when the house was being built.

[AJ]

How does one---such as myself, with virtually no experience---go about determining the quality of those expensive/hard to fix aspects of a house?  I.e., foundation, roof, plumbing, electrical.

That's where home inspectors are worth their weight in gold. They can't catch everything, but they are great for pointing out potential trouble spots (after all, they do it for a living!) 

[Blindsquirrel]

 Dude, buy a foreclosure!  Currently can buy one for waayy less than building.