Build or Buy? A Housing Market Dilemma

Building provides custom homes, but the smart money buys.

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The spring house-buying season is underway, and early signs point to the beginnings of a recovery in the housing market. Houses are priced to sell, rents are on the rise, and mortgage rates are at historic lows. All of these factors are contributing to a surge in positive sentiment among brokers, sellers, and buyers.

A number of important decisions are involved in the purchase of a home. But one of the most basic decisions is the first one, which will impact the rest of the process: buy an existing home or build one from scratch? U.S. News spoke with housing experts to highlight the advantages and disadvantages of each strategy. While the decision to build from scratch gives buyers a number of benefits, the prices of homes already built provide a clear incentive to purchase an existing home.

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The cases for and against building. The primary advantage of building a new home is that it can be built to individual specifications. These houses, know as custom homes, can be made in the specific vision of the buyer and changed as the building process progresses.

Tract homes, or houses that can are built in very similar styles with small variations, allow for limited customization. These types of homes are built in developments that provide built-in communities. They're also cheaper than custom homes because building similar homes cuts down on labor costs.

New homes also have the most up-to-date technology and building materials. They are more energy-efficient than older homes, which helps keep electric bills low.

But there are also disadvantages to building a new home. In addition to paying for construction of the home, buyers also have to purchase the land the home will sit on, adding significant costs.

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There's also the time factor to consider. Once an existing home is purchased, the buyer can move in immediately. New homes can take months or longer to build.

Construction costs are also significant. Contractors have been hit hard by the housing downturn, and many are offering discounts on new construction. But these costs can rise quickly—initial estimates are rarely accurate.

Robert Simons, a professor of Urban planning at Cleveland State University, says the process of building a home is not worth it for most Americans. "If you're going to build, you're on the upper end of the market. At this point, it's an elite type of activity," Simons says. "If you're that far up and you haven't built, it might be something for you to consider. For the rest of us, there are way bigger discounts in the existing home market."

The case for and against buying existing home. According to Simons and Walter Molony, a spokesperson for the National Association of Realtors, the case against buying an existing home is very thin. The only true advantage that building a new home provides in the current market is customization. All other factors indicate that buying an existing home is the best financial choice.

"New home sales have been at record lows, in part because 80 percent of builders are small businesses and can't get construction loans," Molony says. "Existing-home prices have over-corrected and are now selling for less than the cost of construction in most of the U.S. As such, the price differential between new and existing homes is historically high."

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Simons adds that unless a contractor is offering to build the house at a deep discount, building in the current market is hard to financially justify. "You can get great deals on existing houses, and there's not much [tract] housing going out," Simons says.

In addition, new homes require new appliances, adding to the total cost. Existing homes already have appliances, and upgrades can often be negotiated during the bidding process.

There are also benefits beyond the financial. Buying is a much less stressful process than building, since so much can go wrong during the construction of a new home. Existing homes don't have nearly as many downside risks.