Building a home rather than buying one allows you to customize it to your needs, among other advantages. However, construction timelines have lengthened due to material and labor shortages, and this trend is being reflected in price tags. The average price of a new-construction home in November 2022 was $543,600, up from $496,900 in January 2022, according to the U.S. Census Bureau.

With high prices, high interest rates and inflation contributing to the affordability crunch, the housing market is clearly in flux. And determining whether it’s cheaper to build or buy is getting more complicated.

Key home-buying and building statistics

• Average price of new construction home now (November 2022): $543,600 (U.S. Census Bureau, HUD)
• Median sales price of existing single-family home (October 2022): $454,900 (U.S. Census Bureau, HUD)
• Labor costs for a new build: 30%-50% of project (HomeAdvisor)
• Materials cost: 30%-50% of project (HomeAdvisor)
• Building permit cost: $1,200-$2,000 (HomeAdvisor)
• Construction loan down payment: 3.5%-20% or more

Inflation continues to impact new builds, in particular, reflecting rising labor costs as well as the increasing price of materials.

Costs of building a home

The costs of building a home include labor, supplies, permits, architectural drawings and inspections. You can cut down on expenses if you do a lot of the work yourself and select cheaper materials. Overall, the cost of building a home is largely contingent on how much you choose to spend on each component of the project.

How to finance a new construction home

You can finance a new build, only not quite in the same way as if you were buying an existing property. Instead of a mortgage, you’d take out a home construction loan — a short-term, higher-interest loan that provides the upfront capital needed to build a residential property. Borrowers supply building plans, project timelines, and financials upfront, and loan terms are typically one year. During this time, the property should be built and a certificate of occupancy issued.

Borrowers typically pay interest only on the loan during construction. The principal remaining balance is then converted into a traditional mortgage once construction is complete.

Costs of buying a home

The costs of buying a home include:

• Down payment – Between 3% and 20% of purchase price
• Closing costs (including lender fees, such as an application or an origination fee, an appraisal fee and any mortgage points) – Typically 2-5% of the mortgage loan
• Mortgage insurance – .58-1.86% of your original loan balance
• Homeowners insurance – Cost varies by state; national average is $1,383 for $250,000 coverage
• Property taxes – Depends on locality; median annual cost in the U.S. is $2,578
• HOA fees – If these apply, average is $170 monthly, according to U.S. Census Bureau American Housing Survey estimates.
• Home repairs or upgrades

One of the most significant upfront costs of buying a home is the down payment, the portion of the home’s purchase price that you pay upfront, in cash. In addition, when you apply for your mortgage, you’ll need to pay for a number of services, ranging from appraisal fees to attorney’s fees. These closing costs add up to 2 percent to 5 percent of the amount that you’re borrowing. Once you’re a homeowner, you’ll also be responsible for taxes and insurance, and you’ll need to be prepared for occasional repairs and upgrades.

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How to finance a new home purchase

Shopping for a competitive mortgage is key to lowering the costs associated with buying a home. Negotiating fees with the lender, purchasing points to lower your interest rate, and applying for down payment or closing-cost assistance can all be a part of your saving strategy.

Pros and cons of building a home

Pros of building a house

• Get exactly what you want – Building means customizing. With a stick-built house, instead of wishing your home had a certain kind of flooring, a sunroom or some other special amenity, you’ll be able to tailor the property to your exact needs. You also won’t be limited to a specific location or neighborhood.
• Avoid the hassle of competing offers – When you build a home, you take the back-and-forth with other buyers out of the equation. You also won’t have to worry about overpaying because the price isn’t being bid up by numerous offers.
• Move-in ready – When everything in your home is new, you shouldn’t have to worry about any major repairs (at least at the outset). Builder’s warranties should cover any problems that do arise in the first year.
• Wider market appeal – Your home is ultimately an asset, and when it comes time to sell, a newer structure could give you a competitive advantage.

Cons of building a house

• More time – While you’ll save time on attending open houses and scouring online listings, you’ll have to wait to move into your brand-new home. It takes just over seven months (7.6) from start to completion to build a single-family home on average, according to 2021 data from the U.S. Census Bureau — though individual owner- or contractor-built homes can as much as a year. If you’re paying rent during that time, that’s an extra cost to consider, too.
• More decisions – A blank canvas means you can customize your home, but it also means you’ll have a lot of decisions to make. If you’re busy with work and family, it can be challenging to focus on every piece of the construction process.
• Contractor challenges – Delays, miscommunication and issues with subcontractors — there are plenty of hiccups that can happen while building a home. Be sure to vet a few different builders to understand their work approach and timeline, and be prepared for speed bumps. Include time of essence, continuous manning and right-to-remove clauses in your contracts with the pros you hire — these can help protect you in the event of delays or non-performance.
• Cost overruns – While you’ll have a budget in mind at the beginning of the project, there will almost always be expenses you didn’t anticipate, or materials you end up spending more for, that can add up to well above what you first set out to pay. Be aware of change orders, which could be a sign of an unscrupulous contractor. Make sure you understand the builder’s plans, finishes and specifications before signing an agreement.

Pros and cons of buying a home

Pros of buying a house

• Faster move-in time – Buying an existing home means you can put a move-in date on the calendar much earlier compared to constructing one from scratch.
• Potential bargaining power – With existing real estate, you might be able to leverage data to get a better price. For example, if a home you like has been on the market for more than 30 days, the seller could be willing to come down on price, or if a similar property in the area is priced lower, you can use that to justify a lower offer.
• More options – If you’re set on living in a specific area, it might be easier to buy a home there than to try to find a lot to build on.
• Ability to budget for renovations over time – You can make upgrades to an existing home as your budget and time allow, rather than having to focus all of your resources on a major, months-long project.

Cons of buying a house

• Potential market competition – That bargaining power mentioned in the pros? It might be zero, depending on where you’re looking. According to a recent Confidence Index from the National Association of Realtors, sellers received an average of about 2.4 offers. In a hot seller’s market, buying can feel like being at an auction as others drive up the price.
• Older appliances and systems – While it’s a new house for you, it’s technically been used. Depending on the age of the property, you might need to pay for repairs sooner than you expect. Your insurance rates will likely be higher than what you would pay to protect a new home, too.
• Compromises – The odds of finding your dream home in reality are low, so you’ll have to be willing to compromise, such as having one less bedroom or a smaller yard, when you find a home in your price range.
• No builder warranty – New-construction homes typically come with a builder’s warranty that offers some protection from major problems. With an existing home, especially an older home, you likely won’t know who completed the job and won’t receive any guarantees for parts, labor or workmanship.

Should you build or buy a house?

As you consider whether building or buying a home is right for you, it’s important to recognize that both processes include plenty of costs and potential stressors. The end result, though, should feel well worth it.

Think about the existing properties you’ve toured, your timeline for moving and your expectations for this new home. If building is your route, enjoy watching that dream home come to life. If buying seems like the better move, follow this guide on how to get the best mortgage rate.