Should You Build a New House or Buy Used?

You’ve heard the stories. Maybe you’ve lived them.

A new home hits the market in your area. It’s got curb appeal, an updated kitchen and is in a good school district. You and your partner take off work an hour early and meet up with your real estate agent at the house only to wait outside for 20 minutes while the previous showings finish up.

If it’s priced correctly, it will have 20 showings and 20 offers before the day is over.

Someone offered 10% over asking price. Another family offered all cash. The old guy from the Monopoly game offered Park Place, Boardwalk, and all 4 railroads for it. You were outbid before the sun set.

You start thinking, “Should we just build a damn house ourselves?!”… well, maybe!

Here’s why houses are so hard to buy right now:

Demand for homes has spiked since the pandemic. When you’re forced to work from home, not to mention eat, sleep and play there, your 2 bedroom apartment suddenly feels a bit more cramped and the itch to get a house (or a bigger one) starts.

It’s like a game of musical chairs where everyone just wants to sit down (in their new living room) before the music stops.

Well if the houses are the chairs, where’s the music coming from?

The music is a combination of low inventory with high demand, low interest rates, and work-from-home orders.

Not to mention record high savings rates of those who weren’t affected by pandemic-caused job losses. Many stimulus checks went to those that just left them in their bank account. The biggest hurdle to home ownership, the down-payment, becomes possible for many families in this environment.

According to J.P. Morgan, the savings rate of those in the US is at record levels:

The final piece of the melody is that little generation called Millennials. You know, that group of ne’er-do-wells you can easily find because the scent of cotton candy vape smoke is never too far away.

According to the generations that raised them, these kids would forever live in their parent’s basements but seem to have grown up instead and now want to start having kids and settling down:

Millennials are now the largest generation according to this Brookings Research and they need homes to start families or work remote.

The pandemic poured gasoline on the fire of demand for houses.

As I’ve written before, there are a lot of trends that may continue to fuel this fire. Even if we get the fire under control, prices may simply cool off a bit and keep rising, just not at astronomical levels.

So should you build a new house or continue to look for a used one?

I’ve bought one used house before and just recently my partner and I decided to build a new one. So I’ve seen both sides. We are 30 and able to work remote. Your situation may vary, but we considered the following:

No bidding wars. With a new custom-built house, there is no bidding wars against other people. There was no need to visit 20 different houses. No need to play the negotiation game. What you see is the price you pay based on the options you select. Some people may view this as a negative. I love negotiating for things like cars but I didn’t want to negotiate when the home seller holds all the cards like in the current housing market.

Housing market cycles. New homes will likely retain their value more than used homes in the event of a housing bubble burst. Back in 2012, after the fallout from the 2008 housing crisis, new houses sold for about $190/sqft and used houses in our area sold for about $120/sqft. Today, new houses in our area are selling for about $200/sqft and used ones are selling for $150-160/sqft.

Mortgage interest rates. Another benefit to buying new construction was that we were able to use a construction loan which allowed us to lock-in an interest rate at today’s numbers. A good interest rate can mean thousands of dollars saved over the lifetime of a loan. Had we spent too much time waiting for the right used home, hoping we could negotiate a deal, and finally moving, we could easily see interest rates a whole percentage point higher as the FED tries to cool down expected inflation.

Warranties. New homes often come with a warranty and some appliances. Ours even came with a 15-year warranty against leaks or cracks in the basement. Warranties are not always fun to deal with in the event you need to exercise them (in fact, they are a nightmare), but it may be better than shelling out thousands of dollars on an unexpected repair in your first year of home ownership.

Quality. The technology going into new homes has really improved over the last few decades. Insulation, design, installation techniques, materials, appliances, and connected devices have all gotten a lot better over time.

No remodeling. I’ve done it once and learned a lot, but stripping down a house and rebuilding it would have been a poor use of our time as we are both more focused on our careers and future family plans.

Higher price. This is the biggest downside. You will spend more for a new house than any comparable used house. Just like a car. But the above conveniences may outweigh the price difference.

Houses aren’t great investments after you consider the maintenance, taxes, insurance, emergencies and labor involved in managing one, but we felt this route checked the most boxes in line with our resources.

We were also incredibly fortunate that we could roll the equity I had built up in my previous home into a new home. First-time home-buyers will have a more difficult time coming up with the down-payment without help from mom and dad.

Anecdotally, many young people I’ve talked to in our new neighborhood are first time buyers. They also drive suspiciously expensive cars. Is a credit bust looming? Hmm… Rest assured, The Sensible Judgmental Merchant will be watching this story closely!

Regardless of the price or the date you can afford it, after you buy a house it becomes a home. A home is where memories happen worth more than any amount of money. It’s the place you bring your first child back to from the hospital, where you spend holidays with your family, and where you can escape from the craziness of the world.

Choosing when and how to buy a home based on interest rates, macroeconomics, and a dozen other what-ifs is far less important than the “why?”

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4 thoughts

  1. Having just bought a house, I was super curious to see what comparisons you had. A lot of this rings true for me as my S.O. worked regularly all throughout the pandemic so the stimulus checks were house money. I’d say another element of building a house is time. Once an offer is accepted might take a month to move in, but to build a house would probably take much much longer, no? But I suppose at that point, say least your have an end date for moving out of a cramped apartment or parents house.
    PS – totally with you in the whole “never fixing up a house again” front

    1. Oh yeah agreed time is another big factor! Our house took 4 months to build after we signed everything. Thankfully we found someone to sublease our apartment. At the end of the day it’s a lot about willpower to just burn through tasks when you get home from work and if you re willing to do some inconvenient things for a few months you can make it work. I am very curious – were the average prices per sq. ft. in line with your recent purchasing experience? I am always impressed when people my age have already remodeled a house and moved onto another one lol. I was only able to do it thanks to a lot of patience and help from my older brother. I was useless when I moved in to my first house. Better now 😅. Are you guys settled in to the new place yet?

      1. Haha we had a special and very lucky situation where my significant other’s father didn’t want to live in his house anymore but didn’t want to do the work to fix it up for selling. So we did the work for him and he sold it to us. Definitely wouldn’t have a house otherwise haha. But it was about a year of weekends to work on it and we’re still in progress! Moved in a few months ago, but definitely still some projects going on.

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