The cost of lumber has zigzagged since the start of the pandemic. And after dropping substantially from previous highs in 2021, its price is back up again. That's caused construction costs to soar and made home renovations pricier for property owners to swing.
Recently, the National Association of Home Builders estimated that the average price for a new construction home is now $18,600 higher than normal due to higher materials costs. And that begs the question: Is new construction worth pursuing in an already inflated housing market?
The upside -- and downside -- for everyday buyers
If you're looking for a home to live in, new construction holds lots of appeal. For one thing, it could mean buying a home you don't need to fix up at all. And depending on the builder, you may have a chance to customize your newly built home to meet your specific needs and taste.
But there's a drawback to buying new construction, and it's the higher cost involved. Home prices are up across the board right now, and mortgage rates are no longer sitting at the lows we saw in 2020 and 2021. As such, you may find that swinging new construction puts you in a tough financial spot.
What investors need to know
It's somewhat easy to make a case for buying new construction as a primary residence. You get the benefit of a move-in-ready home that's potentially customized to meet your specific needs.
But from a real estate investment standpoint, buying new construction may not make as much sense. While newly built homes have the potential to appreciate over time the same way existing homes can, their higher up-front cost could eat into your profits.
Plus, new construction homes generally get hit with higher property tax bills than existing homes comparable in size and updates. That's another expense you'll have to bear through the years.
Also, while there's strong demand for rental homes right now, there's a limit to what tenants may be willing to pay. So, if you buy new construction, you might end up taking the risk of not being able to command enough rent to cover your costs to the extent that you're hoping for.
Remember, the typical tenant may not distinguish too much between an existing rental in good condition and a newly built home that's never been lived in. So, you'll really need to ask yourself whether it's worth paying a premium for new construction when it may not result in much higher rent.
Will new construction prices stay high?
Once the supply chain issues that have plagued the construction market better resolve themselves, the costs of lumber and other building materials should start to drop. From there, newly built homes should become less expensive to purchase.
But even then, if you're buying new construction solely as an investment or income property, you may want to think twice before paying a premium for a home no one has lived in before. You may be better off growing your portfolio with an existing home or using your investment dollars to renovate the properties you already own.