Interest rates are high, and both material and labor costs are high. It’s an election year and the political climate and stock markets are unstable. Is now a horrible time to build a custom home in Michigan? Should I wait for a better market, for lower prices, or hold out until interest rates drop?
You’ve probably pondered some variation of these questions as you thought about building your own custom home in the Grand Rapids area. Let’s take a brief look at some of the points to consider. Not everything will apply to you, but I hope you will find enough tidbits to help you be confident in your decision; whatever that ends up being.
Are Home Prices Actually High Right Now? Why Yes, Yes They Are.
For more detail, check this interactive out.
The natural question is: Why?
I found two major factors, though there are probably more:
- Average home size continues to increase, while families get smaller. “The median home size for newly constructed houses has increased by 150% since 1980.” Larger homes cost more.
- Inflation in construction is higher than in the general market. This data was not readily digestible, but it appears that the inflation of residential construction (with size taken out as a factor) is roughly double the rate of the major inflation indexes most of us hear about. Another way I could say this is the cost increase is not only due to the lower purchasing power of the dollar; there are also factors making home building more costly (such as regulations), construction labor more costly (few people getting into the trades), and building materials more costly (better products, higher standards).
The bottom line: Waiting will not work in your favor. In fact, prices have lowered only once in the last 50 years. Consider the following:
“Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume went down 33% and jobs were down 30%” SOURCE: www.edzarenski.com
What About The Expensive Interest Rate?
Without a doubt, the interest rate has a significant impact on housing affordability. But the reality is that we’ve been spoiled in the last decade. Anything under 8% is below the average rate of the last 50 years. SOURCE: www.bankrate.com
Maybe you’re like me, and you think of interest payments as throwing money away. One thing to think about is this: There is nothing you can do about the interest rate, but there certainly is another rate you CAN do something about: your energy bills.
You can stop throwing away the costs of energy (and maintenance) every month!
Why not build a home designed to minimize or even erase your energy bills, such as a Zero Energy Ready Home or a net-zero home? These savings don't just last for the length of a 30 year mortgage, but the entire lifetime of the home! R-Value Homes, a DOE ZERO ENERGY READY HOME Partner, builds ICF homes that outlast pretty much anything out there. Think about passing on to your grandchildren a legacy of no energy bills!
Lastly, if interest rates do drop in the future--you can refinance. A little further down I will discuss why you shouldn't wait to start your custom home build until the interest rate gets lower.
But Prices Are High! Isn't Now A Terrible Time To Build?
It’s true, labor costs are at an all time high, and many building materials are as well. However, labor and material costs have always been on an upward trajectory.
You may entertain the idea that costs will drop if the housing market cools down, but the housing market is already cooled down. The law of supply and demand teaches us that now, when things are cooled off, prices are lowest.
It seems likely that interest rates will go down in the next year. When that happens, many people will be clamoring to build. Countless families in West Michigan have delayed building their custom home in hopes of better rates. They already have property, blueprints, and in some cases, their builder; all ready to go at a moment’s notice. We are still at historically low levels of housing inventory. Supply is low, and when demand increases, what will happen? That’s right, construction will boom, which will push prices higher.
“When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on (construction) inflation.”
“In times of rapid construction spending growth, nonresidential construction annual inflation averages about 8%. Residential has gone as high as 10%....Residential buildings inflation (prior to 2021-2022) reached a post-recession high of 8.0% in 2013 but dropped to 3.5% in 2015. It has averaged 5.3% for 8 years 2013-2020.” Emphasis mine.
SOURCE: www.edzarenski.com
The lesson is this: you want to start your home before the market changes. By the time you know things are good, prices will have already adjusted. It seems likely that the lower interest rate will be at least partially offset by higher costs.
When Is The Best Time To Build A Home?
Let’s run the numbers using data from above:
Today
If the home would cost $750,000 today, and you were putting 20% down, the deposit is $150,000, leaving $600,000 borrowed. At 7.00%, the monthly payment for a 30 year fixed is $3,991.81
Our imaginary future
Let’s add 5.3% for the typical construction inflation:
$750,000 x 1.053 = $789,750.
Now add 4% for the inflation produced by the increased demand of a 1% drop in interest rate:
$789,750 x 1.04 = $821,340
20% down is $164,268, leaving $657,072 borrowed. At 6.00%, the monthly payment for a 30 year fixed is $3,939.48. This is $52.33/month lower (YAY!), though the down payment went up over $14,000 from $150,000 to $164,268.
I need to remind you of what we mentioned earlier: building now, then refinancing when the rate goes down, is a great strategy that may result in the best of both worlds for you.
The best time to build is NOT when the housing market is up or down. It is not contingent on the market at all. If you need a healthy, comfortable home designed to suit your unique lifestyle, the best time is when it is right for your family. There will never be a better time than that.
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