Q: With all the talk regarding home values going down, is it a good time to build a new house at this time? Are building costs in sync with market value? I wouldn’t want to build at a cost of $300,000 only to find later that the market value of the house is less than the cost to buy the land and build.
A: It’s a great question – one that doesn’t have an easy answer, unfortunately.
There are hundreds of builders who have gone out of business or have taken millions of dollars in write-downs for land they bought and didn’t build on.
At the same time, if you own a vacant lot in the middle of an established neighborhood, you may be able to build a great home that will not only retain its value but increase it over time.
Here’s some extra credit home work that might help you make your decision: If you’re planning on building a 2,300 square foot home with the modern conveniences and upgrades that many new construction builders add to homes and it will be located in a neighborhood where homes are selling for $100,000, you’re likely to find that building the home will not be economically feasible.
But if homes are selling for $400,000 in that neighborhood, you might find that building a new home is cheaper than buying one. The key to your question is for you to understand the true value of homes in the area in which your lot is located and to understand what type and size home can be built there.
You might want to sit down with a contractor to determine what the average cost to build a home runs and then see where things go from there. In some parts of the country, building costs can run under $100 per square foot while in other areas the amount can be significantly higher. If you put up a manufactured home (pre-built in a factory, shipped in pieces to your location and assembled in a day), the costs might be under $80 per square foot.
Finally, if you’re building a new home in a neighborhood of new homes and neighborhood values have remained stable through these times of financial instability, you might be able to get an architect, contractor and building trades willing to work for you at a cost that would be substantially less than what they would have been paid a year or two ago.
Take a look around and how many new homes there are in your neighborhood of choice and how many are in foreclosure and what’s selling. Imagine this doesn’t change for 5 years or more. That’s where you could be in the worst case scenario.
But if you’re planning to build a home and stay there for 10 to 20 years, unless you’re very unlucky and you buy in an edgy neighborhood that never takes off, the length of time you’re planning to stay should see home prices stabilize and ultimately rise.
Jan. 19, 2009.