This week I wanted to address a question that’s come up a few times lately: Is it better to buy an existing home or build your own? It seems the lack of available homes to buy in Sonoma County is forcing folks to get creative.
Times are challenging for home buyers. It’s old news at this point that a lack of supply is causing buyers to contend with all sorts of competition that often seems to have a limitless supply of cash. This can be demoralizing and incredibly stressful. The basic economics of this has been driving the average price of existing single-family homes to almost $830K locally, up about 10% from the same time last year, according to Zillow.
This is unsustainable and leads to lots of buyer frustration (but great news for sellers, of course) in the short-term. It’s also leading some to consider building the home they can’t find on the market. Or moving out of the area and building it there.
The idea of having your home custom built, or even semi-customizing in a new development, is appealing. You can create exactly what you want, everything is shiny and new and up to code and, at least some say, doing so maybe a little cheaper than buying an existing home.
But these would-be home builders are up against an array of challenges perhaps more daunting than low inventory. And the biggest issue right now seems to be inflation. On everything. Land is expensive, and so is lumber, concrete, and drywall. Even copper wiring and truss prices are through the roof (sorry, couldn’t resist the pun). And those are problems on average across the country. Locally, toss in our fire-related backlogs and just getting a contractor to finish your project is challenging, not to mention expensive.
But which is better, to buy or build? From my research and conversations with folks over the years there doesn’t seem to be a clear financial answer to this question. Lots of anecdotes and some data suggest that buying is more expensive than building after you factor in all the upgrades to make the home the way you want it. Newly constructed homes can also be cheaper to run than an older home, at least according to the National Association of Home Builders (their opinion is a little biased, I think, but seems intuitive). Still more anecdotes bemoan the cost overruns and unexpected delays encountered when building a home. In other words, talk with ten different people and you’re likely to get ten different opinions.
Ultimately, buyers and builders both tend to overpay because their transaction usually ends up being more expensive than intended. And the recent inflation uptick is only increasing uncertainty.
The bottom line is you should look hard for an existing home to buy, potentially even a fixer-upper, before embarking on the builder’s journey. The reason is that the existing home is obviously already there, is more or less a known quantity (following good inspections during the escrow period), and you can take possession sooner. And, at least in theory, you can control costs more than a contractor can potentially over a multi-year timeframe. (See one of the links below for more information on this.)
Beyond that, buying or building is a huge financial and life decision, so try not to let market forces create a false sense of urgency. Easier said than done; believe me, I know.
To help with decision-making I’m including a good basic pros and cons list from bankrate.com. You can use it as a jumping off point to start your own research.
I’m also including a short article from Bloomberg detailing how inflation is driving up the price of just about everything that goes into a new home, with good graphics showing price increases at different construction stages.
Have questions? Ask me. I can help.
- Created on .