How much does it cost to build a house?

Although it may seem daunting, constructing a customized dream home is becoming popular these days, due to the low inventory of single-family houses in the U.S. Fewer homes mean more competition and higher prices, so building can be a viable alternative. According to the U.S. Census Bureau and HUD (the office of Housing and Urban Development), residential new construction permits are up 30% over the past year.

Another reason building from scratch is desirable is because many people don’t want to spend endless hours house hunting. It can be frustrating and exhausting, especially if you are trying to check every box on what you want in a property. Not only that, you may have specifications for a new home, like certain building materials (e.g., those intricately marbled granite countertops), custom windows, interior finishes, flooring and fixtures. In this case, constructing your own home may be the perfect solution, as it enables you to check every single box on your “dream home” wish list. But before you decide to take the plunge and hire homebuilders, knowing what’s involved is critical, and it’s often more complex than you think. You’ll need to determine what the real estate housing market is like where you want to live, and compare how much it costs to buy, vs. how much money you will need to build.

Buying vs. building: the average price

The median cost to buy a single-family home in the U.S. has risen 17.2% over the past year to $329,100, according to the National Association of Realtors. Of course, this number varies by geography, so if you want to live in Boston, you’re going to be paying an average sales price $505,000. If you’re buying in Los Angeles, you’ll be paying around $635,000 on average.

The cost of building a custom home is also going up. The national average (not including the land) is somewhere between $150,000 and $450,000, according to HomeLight, an online real estate referral service. So, construction costs for a farmhouse in Cleveland are going to be much less than those required for a high-end contemporary on the outskirts of New York City, for example.

If you want to ballpark this cost based upon a home’s size, there are square footage estimates. According to a 2019 survey by the National Association of Home Builders (NAHB), it’ll cost $114 per sq. ft. to build a typical single-family home. Since the average size of a newly constructed single-family home is 2,594 sq. ft., the price to build it would be around $285,000.

Of course, building the house is just one part of your overall costs. The average square foot price doesn’t include the land, expensive systems like heating ventilation and air conditioning and septic, or labor costs.

These days, a major reason for the high price of home building is due to skyrocketing lumber prices, as a result of the pandemic. Due to the quarantine, homeowners have so much time at home, they are finally getting around to all those put-off projects. The surge in renovation and DIY projects are creating a huge demand, while sawmills have reduced production capacity. This has driven the cost of wood up by 280%, an all-time high for the industry. According to NAHAB, the price of lumber can add nearly $40,000 onto the price tag.

If you’re undeterred by rising homebuilding costs and want to move forward, the first place to start is, literally, from the ground up. You’ll want to select the land right away, because the lot size and nature of the site will determine the type and square footage of your new home. If you’re not sure how to go about searching for land, a real estate agent can help streamline the process. They can identify lots for sale in the area you want to live and draft up contracts for ownership. Depending on the cost of the property and your finances, you may need to get a construction loan, as some lenders require a down payment on the land before you start building.

The second step is to outline a budget. The best way to determine the most accurate price is to list out all expenses and associated elements. A general contractor may be able to provide you with some guidance based their experience. Local building supply retailers can also give you some basics on building materials and fixtures. When everything’s itemized, it’s also a good idea to factor in a 20% contingency to cover any unexpected costs.

The following chart itemizes the main components and average costs of building your own home:

Does not include labor costs or land, and the size of the home may cause prices to go up or down.

As illustrated above, interior finishes are the most expensive aspect of new construction representing 25% of the costs. Framing follows at 17.4%.

To manage all this work, you’ll want to pick a licensed general contractor. Selecting a trusted pro to supervise the building of your new home — and all the subcontractors who will be involved — is critical to a smooth project that is completed within budget and on schedule.

If you decide you don’t want to embark on a full-fledged homebuilding process journey, but want a tailor-made new home, a house kit might be the answer. Also called, “mail order homes,” these first came on the scene in this country during the early 1900s. Today, there becoming more popular as people seek cost-effective housing alternatives with little fuss, as they are shipped right to your door. Except for the foundation and the roofing, these kits are assembled, so they are perfect for DIYers. There are many designs and floor plans available, from high-end, to more moderate and many kits allow you to select the finishes and extras you would pick if you were building your own home. These are available through amazon.com and specialty retailers. If you’re not a DIYer and don’t want to put together one of these model homes, many real estate sites list these “mail order” properties that are ready to occupy.

Tiny homes that are typically only 100 to 400 sq. ft. are also becoming popular for first time homeowners and empty nesters. These are much less expensive because these homes sit on a trailer. All pre-made modular homes are constructed offsite and assembled on your property, so there won’t be additional costs for the foundation, an architect or an engineer, for example.

The bottom line

Before you make any decisions, it’s probably best to chat with a local contractor in your area to get a sense of how much new construction costs in the area. The numbers presented in this article will give you a ballpark estimate, but you’ll want to figure out the prices for everything on your list and put together a realistic cost sheet and timeline. As with any big purchase, you will need to evaluate your finances. An experienced loan officer can help you determine the size of the loan you’ll need and help you decide whether you can swing it — or not.

Ready to build or to buy?

Whatever you decide to do, Citizens can help turn your biggest purchase into one of your smartest, with competitive mortgage loans. Our experts will also help you on every step of your journey.

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