I am consistently asked why the cost of building a new home is so much more than buying an existing home. Many buyers expected that with what happened to the existing housing market, the same would happen to construction costs. One would figure, that because the market dropped, the cost of construction should come down like the price of existing homes did. The opposite actually happened with the costs associated with building. Most of the products used in the cost of constructing a new home went up around 3%-5% on average every year. Items like lumber and petroleum products actually increased much more on an annual basis.
While the lack of demand and the pressure on prices from foreclosures pushed our housing market lower by 30%-40% locally, the international market for building materials never saw a drop in demand. Since the United States is a large producer and supplier of building products overseas, the reverse actually happened. If you figure an average of 5% of a price increase in building materials every year from 2009 to the present then we have had an accumulated increase in the cost of building materials of 18%-30%. The other factors that have added to the cost of building have been the new governmental regulations affecting the energy efficiency of new homes. The new standards adopted by our building departments in 2010 have added an additional $8,000-$15,000 to the average cost of a home. The good news in our market is that labor has remained fairly level with only modest increases in some sectors. The other good news is that land is at the lowest that I have ever seen.
So if you take at a typical 1800 sq. ft. home in 2008, whether it was a new home or an existing home, the average price would have been around $190,000. The selling price of that same existing home today in our market may be around $140,000, but the cost to construct that home would be $225,000, with the cost of land.
This is just a very general overview, but I hope if you are wondering why it is so much more expensive to build, rather than buy an existing home this will give you some insight.