If you’re trying to find a home to buy right now, you’re probably scratching your head over where to look. According to figures from the National Association of Realtors, there’s currently a three-month supply of housing inventory available -- far short of the six months of supply that traditionally reflects a balanced market.
A lot of people who own a home had locked in record-low mortgage rates during the pandemic, which means that moving simply doesn’t make sense now that rates are much higher. Think of the housing market like a game of musical chairs: Not many homeowners are willing to stand up right now.
Instead of trying to find sellers who want to give up their current abodes, you might want to look into building a brand new property. You’ll need to weigh a number of considerations to figure out what makes more sense for your money. Read on to determine whether you should build a new house or buy an existing home.
Is it cheaper to build or buy a house?
Nationally, it looks slightly cheaper to buy an existing house than it is to build a new home. Numbers from the US Census Bureau show the median price tag of a new home was $415,400 in June -- $5,000 higher than the median price tag of an existing home ($410,200, according to the NAR).
However, the question of affordability comes back to the No. 1 rule in real estate: Everything is local. Consider research from StorageCafe, which analyzed land prices and contractor fees versus asking prices of existing homes around the country. There are plenty of places where building a new home looks much cheaper than buying one that’s already standing.
In California, for example, total building costs added up to $495,000, while the median price tag of an existing home was $700,000. Head to Pennsylvania, however, and it’s better not to bother breaking ground: The median sales price of an existing home was $183,000 less than the costs associated with building a new one.
Understanding the homebuying process
If you’ve never purchased a home before, it’s important to recognize that it’s not as simple as finding your dream house and getting a mortgage to finance it. There are a number of steps involved:
- Get preapproved for a mortgage: You’ll need to share all your personal finance information with a lender to get a sense of what they’re willing to loan you.
- Go house hunting: A preapproval letter will give you a good idea of how much you will be able to borrow with a reasonable monthly mortgage payment. Now you have to start touring open houses with properties that fit in your budget. This can be a fun part of the process -- and it can also be frustrating if you realize that your budget means you’ll be looking at smaller spaces or outdated homes.
- Make an offer: When you make an offer, the seller doesn’t automatically accept it. In fact, in today’s market, you might wind up competing against other buyers.
- Sign a purchase agreement: Once a seller accepts the offer, you’ll go to contract. It’s smart to have an attorney on your side at this point to insert contingencies to make sure you can back out of the deal.
- Get a home inspection: Home inspections aren’t required, but they’re a very smart decision. You’ll pay for a professional to look over every inch of the property to identify any potential issues. If you find any, you’ll be negotiating for concessions from the seller.
- Wait for formal approval: The mortgage underwriting process requires a lot of time. Your lender’s loan officers need to verify your information, review the results of a property appraisal and make the final call on whether they’re going to sign off on letting you borrow the money.
- Close: The last step in the process is the closing day, which includes signing all your documents and paying more closing costs.
Pros and cons of buying a house
Pros
Faster move: The home is already built, so there’s no waiting around for a builder to actually build it.
Fewer decisions: Rather than weighing in on finishes and design choices, you get to compare existing properties and limit your need for input.
Existing neighborhood: If the home is in a neighborhood with loads of other properties, you’ll benefit from a built-in community vibe and proven track record of stable property values.
Cons
Potential for major maintenance issues: The older a home is, the more likely you’re going to have to pay for loads of maintenance. Think new roof, new floors and new plumbing -- all very costly pieces of owning a home.
Increased competition: If you find yourself in a bidding war with other buyers, it’s going to drive up your costs.
What you see is what you get -- for now: While building a house will give you the option to pick finishes and contribute some of your own thinking to the design process, buying a house means you’re moving into someone else’s home. You can make adjustments later, but they’re going to cost you more cash.
Understanding the home building process
While buying a house can take around two months from the time you submit an offer to the time you close (this can be shorter or longer, depending on your lender), building a home takes a lot more time.
Data from the Census Bureau shows that built-for-sale homes -- essentially, these are homes that builders make all the decisions -- took just under nine months to complete last year. Custom homes, which involve you getting to make most of the choices, required more than 13 months to finish. So if you want the completely custom home experience, get ready for the long haul.
Here’s a rundown of what to expect:
- Secure the financing: Getting a loan to build a house is a bit different than getting one to buy an existing property. You may get short-term financing, which simply covers the actual costs to build it, followed by another loan for the actual market value of the home. However, instead of looking for two different loans -- with two sets of closing costs -- it’s smart to look for a construction-to-permanent loan, a type of mortgage for those looking to build a home. A construction-to-permanent loan funds the purchase of the land and the house’s construction. Once your home is built, it converts to a traditional mortgage, most often with a 15- or 30-year term. Plus, with a construction-to-permanent loan, you’ll be dealing with only one set of closing costs.
- Find the site: You’ll need to either find an empty plot of land or a lot with a house you’ll need to tear down. If you do need to demolish a house, keep in mind that your costs will increase. The cost to tear down a 1,500-square-foot house is typically between $10,500 and $12,000, but you can pay more to demolish a garage, a deck and a swimming pool, according to data from Home Depot.
- Determine what kind of house you want to build: With an empty lot, you now have a blank canvas. You’ll need to make a lot of decisions about the type of house that’s going to fit your current and future needs. Keep in mind that if you’re building a home with the plans to be there through retirement, it’s important to consider accessibility.
- Meet with contractors to find the right team: After working with a designer, it’s time to find a contractor who can bring your plans to life. Your real estate agent may be able to send along recommendations.
- Get the appropriate permits: An experienced contractor will take care of this for you, but you should double check that you’re getting the appropriate sign-off from the powers that be in your city’s permit office. There can be a maze of different permits and zoning requirements, which can add a lot of time to the process. Additionally, if you fail to get the right permits, you’re likely going to pay some hefty fines to the city.
- Build the home: From laying the foundation to installing the roof, building a home requires a lot of time and a lot of people. Depending on the type of home, you’ll likely need to make a number of decisions during this process, including selecting appliances, cabinets and much more.
- Convert your loan to a permanent mortgage (or take out an entirely new loan): If you secured a construction-to-permanent loan, you’ll need to convert the loan to a permanent mortgage. If your initial financing was solely a short-term loan to build the home, you may need to apply for a new loan.
- Inspect the home and conduct a final walk-through: It’s a brand-new building, but that doesn’t mean it’s perfect. You should still hire a home inspector to verify that the work is up to code and that it’s safe to move in.
- Close: If you’re borrowing money, the final step of building a house is the same as buying a house: a closing that includes signing a lot of paperwork about your obligations to pay back the loan.
Pros and cons of building a house
Pros
Ability to customize: It’s your house, so you get to make the call on major decisions such as appliances, paint colors and layouts.
No worries about past damages: It’s brand new, so you don’t need to be concerned about what owners have done to the place over the past 50 years (or more).
Builder incentives: Builders have been offering plenty of perks including mortgage rate buydowns and covering closing costs to spur interest in new construction, according to the NAR. In fact, more than half of the builders surveyed in May offered some kind of incentive.
Cons
Time: Building a home will take a long time, which means you’re stuck in your current place or renting another home until it’s done.
Unexpected issues: There’s a good chance you’ll run into a few hiccups in the process of building a house: What if the cost of lumber goes up? What if the contractor’s top employee breaks a leg? What if part of the process gets held up in a lengthy permit line?
More complicated financing process: If you’re taking out a loan to cover a new construction, the process is a bit different -- and the longer timeline means you’re going to need to avoid any major changes to your personal finances until the construction is finished. Plus, not every lender offers construction loans, so you won’t have as many options to consider when choosing a lender.
Cost of building vs. buying a house
As you compare the costs of buying a new house versus buying a house that’s already standing, it’s important to recognize that you’ll need to budget for many of the same expenses with either route: a down payment and closing costs on the front end and property taxes and homeowners insurance once your name is on the title. And if you don’t put 20% down in either case, be ready to factor the cost of private mortgage insurance, or PMI, into your monthly payments.
Cost of building a house
When you build a house, you have to pay for every piece of it: the land, the supplies, the permits, the workers to build it, the landscaping in the front and backyard, the appliances -- you get it. The good news, though, is that the costs can actually create plenty of benefits. Those who buy new constructions are increasingly taking advantage of tax credits for energy efficiencies like solar panels, according to the National Association of Homebuilders. If you buy an older home, you’ll likely be dealing with plenty of inefficiencies such as poor insulation or an aging HVAC system.
Cost of buying a house
The costs of buying a house are more straightforward. You’ll need a down payment (unless you’re buying a house with no money down), along with cash to cover a range of closing costs and lender fees. It’s important to estimate your annual home maintenance costs. While you’ll pay these costs for a brand-new house too, it’s a fairly safe bet that these costs can be higher with a significantly older property. The average homeowner spends $2,467 each year on home maintenance, according to data from Angi. If you’re dealing with a home that needs a lot more love and care, you’ll want to stash more in your savings.
Key factors to consider when making your decision
How soon do you need to move? If the answer is ASAP, your solution is fairly simple: You’ll want to buy an existing home. Building a home takes a long time. You could consider a short-term rental while you wait for a home to be completed, but take note that a full year of rental payments isn’t building equity.
What is the inventory like where you want to live? If inventory looks especially low right now, be sure to contact a real estate agent to get a sense of whether they expect the market to shift soon. Sellers tend to list in the late spring and early summer when buying activity has historically been busy.
How much money can you afford to spend? Let’s say your budget is $370,000. The numbers from StorageCafe’s research shows that the build versus buy decision is going to have a different winner, depending on where you want to live. If you’re moving to Nebraska, for example, look for an existing home: The median price tag is $364,000, while you’re looking at $467,000 to build a new one. Head to Tennessee, though, and it’s a toss-up: The median price tag of an existing home is $374,000, while new construction is $361,000.
Do you want this to be your forever home? If the answer is yes, you may want to give some serious consideration to building something that checks all your boxes. Sure, you might be able to find a house that you can update, but you’ll still be dealing with the hassles of construction. At least if you opt to build now, you can live elsewhere until your dream home is done.
The bottom line
There’s no one-size-fits-all answer to whether it’s better to build or buy a house. Both pathways to owning a home involve some potential stressors, and either way, you’re going to have to spend plenty of cash -- both with your upfront expenses and with your long-term costs of keeping the property in good condition. Buying a home -- whether it’s already had an owner or you’ll be the first one when you move in -- is one of the most expensive transactions you’ll ever make. With that in mind, think carefully about what you need and use CNET’s mortgage calculator to figure out what you can comfortably afford.