Homes Are Costing More to Build -- and Buyers Might Struggle to Keep Up
by Maurie Backman | Updated Sept. 7, 2021 - First published on April 10, 2021
Buyers are already struggling to buy existing homes, so it's a problem if new ones become even more expensive.
There are plenty of good reasons to buy a new construction home. For example, you'll have fewer repairs to make early on, and if the home is being built from the ground up, you can customize that space to suit your specific needs. But there's one key reason new construction may increasingly move out of reach: The cost of materials needed to build homes keeps going up.
Lumber, for example, now costs more than twice as much as it normally would at this time of the year. Crude oil, which is used for roofing and flooring materials, has risen over 80% since October. And copper, which is commonly used for piping and electrical work, now costs roughly one-third more than it did back in the fall.
All of this is making homes more expensive to construct -- a cost that's likely to be passed along to buyers. And given the state of the housing market today, the timing couldn't be worse.
Buyers are running out of options
Existing homes are hardly a bargain. Quite the contrary -- an uptick in buyer demand has inflated home prices. In fact, buyers are routinely getting priced out of the market, especially in places where many of the available homes not only cost more, but also need extensive work.
New construction solves the latter problem. In fact, despite new construction's higher price tag, it can often end up being more cost-effective than buying an existing home when you consider the absence of near-term renovations and repairs. But as the cost of building materials skyrockets, it may cease to become an option for the average homebuyer.
The need for large down payments can exacerbate the problem. There are situations where buyers can sign a mortgage and put down less than 20% of a home's purchase price at closing. However, mortgage lenders tend to be stricter when it comes to new construction -- especially homes that allow buyers to customize certain features. As such, buyers who seek out new construction should generally plan on making a 20% down payment -- which could become exceedingly difficult if home prices shoot upward.
Another issue to consider is that builders are notorious for cutting corners and using sub-par materials in new construction properties to boost their profits. Just look up "builder grade homes" on the internet. As the cost of common materials rises, builders may seek to substitute even lower quality materials -- and that's something buyers will need to be wary of.
In fact, given the way material costs are climbing, buyers of new construction need to be extra thorough when spelling out the terms of their purchase agreements (or hire good lawyers to take care of that for them). If buyers specify the materials that are to be used, it could help them avoid getting stuck with sub-par homes with hefty price tags.
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