Over the past few decades, the cost of real estate has risen considerably. This rise doesn’t just reflect the rising costs of property, but also a rise in costs of new construction homes. A house that cost $70.45 per square foot in 2000 cost $134.91 in 2020; almost doubling in the last 20 years.
It has become increasingly difficult for millennials to purchase old homes, let alone purchasing or constructing new homes. So, a question arises; why are new construction homes so expensive?
The rise in new construction home prices can be attributed mainly to land shortages; particularly in metropolitan areas. You can go to the country side, but that means you’ll get farther from amenities as well. Furthermore, houses are now built with elaborate custom designs, thus increasing the cost of construction.
But that’s not all. In this article we will look at the different factors causing this increase in price, and more.
What Is a New Construction Home?
Any home in which the buyer is the first person to live in after construction is called a new construction home. It might seem very simple, right? You buy land, you construct a home on it and live in it; there’s your new construction home.
However, in today’s market, if an investor buys a plot of land, constructs a new house on their own accord (by getting in touch with contractors), gets a real estate agent and sells it to you, it will still be considered a new construction home for you.
So today, home buying also falls in the spectrum of a new construction home; the only prerequisite is that no one should be living in the house before you.
What Makes New Construction Homes So Expensive?
Before we get into the meat and potatoes of why new construction homes are so expensive, let us consider a study published in 2020 comparing the average costs of a new construction home in the US (in 2019).
As evident from the graph above, one of the biggest costs involved in a new construction home was that of interior finishing, going as high as $75,259 in a normal, not-so-fancy house. In 2021, the same ratios are maintained, but the overall cost of interior décor of the same range will cost much more, depending on how you design your home.
The following is a detailed breakdown of a new construction home project, apart from the cost of land, in 2021.
|Work||Cost (Min)||Cost (Max)|
|Average Custom House Cost||$158,300||$483,900|
|Appliances (HVAC, Electric, Utility)||$17,000||$72,000|
|Labor (Per Sq. Foot)||$100||$200|
If you’re looking for the average cost of a new construction home with respect to the number of bedrooms, here are some estimates. Keep in mind, these estimates are likely to go up or down depending on your choice of material (redwood vs. pine wood, for example).
|No. Of Bedrooms||Cost (min)||Cost (min)|
The table above should help you materialize not only how much a new construction home will cost you, but also why these homes are so expensive. Home interior is one of the biggest contributors to the increase in price, i.e., material costs. The more you customize your home, the more it will cost.
Furthermore, if you hire an architect to help you with the exterior and interior design, you’ll have to add that expense as well. For a typical 2,500 to 2,700 sq. feet house, expect to pay a fee of 5% of the total construction costs. A 4-bed house costing $400,000 will be designed by architects for $20,000.
After home interior costs, the second biggest expense you’re going to have to incur is that of labor. For the same, 2,500 sq. feet house, labor costs can rack up to $250,000. These costs are negotiable, though, so leave no stone unturned when trying to get a good deal!
If you haven’t worked a construction site before, we recommend you don’t go full-on DIY for a new construction home. Could the Brooklyn Bridge be built by one person? Or just one group? Perhaps, but it would take forever!
Apart from the raising labor and material costs, there are other costs to consider as well when trying to understand why new construction homes are so expensive.
- Regulatory costs
- More mortgages
- Inspection costs
- New house premiums
New Construction Home Price Comparisons – New vs. Second Hand
New construction homes have the benefit of being new and therefore, there are no chinks, no deficiencies in the house, and there is certainly no history associated with it. However, as you can see from the previous section, new construction homes are quite expensive (and can also depreciate at first).
There is a premium attached to these houses that is included in the cost of purchase if you’re buying it from an investor. However, if you own land and get the house constructed yourself, you don’t have to worry about paying that premium.
Having said that, there are many considerations to make when considering buying a new or a second-hand house. It goes without saying that you can get a relatively bigger second-hand house for the same investment as that for a new construction home.
Here, we will compare the costs of purchasing a new and a second-hand house in more detail.
After the recession, people stopped buying houses for a while, until 2011. That is when the industry started booming again. Here is a chart showing the average percentage returns on investment per square feet.
The biggest costs involved in second-hand houses are those of improvement and repairs. Here is another table to show the average costs you will have to incur, on top of the purchase price (2500 sq feet).
|HVAC||$4,000 – $15,000|
|Flooring||$15,000 – $30,000|
|Roof (After 25 Years)||$5,000 – $20,000|
|Interior||$0 (DIY) – $9,000|
|Exterior||$0 (DIY) – $5,500|
|Bathroom Remodel (Master)||+$15,000|
The problem with second-hand homes is that you never know what might arise. The expenses mentioned above are just the base expenses that you are likely to have to bear, but there may be additional costs as well. For example, that of landscaping, gutter line repair or replacement, tiling, and more.
With a new construction home, you get what you pay for, straight and simple.
Saving Money on a New Construction Home
The first consideration for how to save money on a new construction home is that of your timing. If the house you’re looking to purchase is just a few months away from completion, the cost will be higher compared to if you purchase it before. Usually, a new construction home takes about 6 to 7 months to complete, but it isn’t uncommon for it to take a year because of delays.
Next, you need to give yourself flexibility to include more as and when you feel like it, or make changes in the material being used, but be careful. Don’t let the construction crew get wind of your flexibility, or they may use it to their advantage. We don’t have anything against construction crews, mind you; we just have experience with them. Be strict with your budget.
Go standard in the start and if you’re a DIY-er, upgrade later. Remember, not only does the most recent tech cost more, labor costs involved in installation are also more if the appliance you’re getting installed is high-end. When getting a new construction home built, try to go with standard fittings and upgrade later.
Keep track of your expenses. When building a home, you never know when, what might roll in and increase your expenses. Try to keep track of everything on a notebook or an excel sheet.
And last but not the least, choose your builder wisely. Make sure you compare different builders before choosing one, and DO NOT SIMPLY GO FOR THE LOWEST PRICE ONE. Conduct your research; look at other homes they’ve built, talk to the owner, and then move forward with them.