New Home Construction Costs vs. Low Interest Rates: Why It’s a Great Time to Buy

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It would be an understatement to say that the housing market is booming in 2021. This was already true prior to COVID, but the brief economic downturn in 2020 did not, as some people expected, lead to a slowdown in real estate.

In reality, the opposite situation has emerged: people are more eager than ever to invest in their dream homes. While average time to a sale varies based on location, sellers in many regions are now able to complete the process in just a few months or even a matter of weeks. Clearly, buyers aren’t willing to wait.

With the rise in demand, however, comes a similarly notable increase in housing prices. Data from Realtor.com reveals that, as of April, 2021, nationwide median listing prices reached $370,000 for single-family homes. 

Regional variations do exist, of course, but in general, the rising costs stem from a simple equation of supply and demand. More people want homes than there are homes available. This has ripple effects in several sectors, including manufacturing, for some of the materials most crucial to residential construction.

Escalating prices are a top concern among many aspiring homeowners, even when they recognize the value of today’s ultra-low interest rates.  These competing concerns can make decision-making difficult. It’s tough to know whether the current interest rates are low enough to overcome the increased cost of construction. It’s easy to see why so many are left wondering: how much does it cost to build a house?

To help, we’ve provided detailed insight into the many factors influencing current home buying trends. Keep reading to learn why new builds are more expensive right now and how this relates to today’s low interest rates. 

We will also explain why, despite recent increases in housing costs, it may still be worthwhile to get in on the booming housing market

What Is Driving the Rise in Construction Costs?

A variety of factors influence recent increases in the cost of construction. These range from the price of materials to the recent rise in remote work. The following are among the most noteworthy trends at play:

Increased Demand for Lumber

The cost of steel is considerable these days, but it is far from the only material adding to the expense of building new homes. Lumber is similarly pricey and often difficult to avoid in otherwise moderately-priced construction projects. Data from the Western Wood Products Association suggests that over 90% of today’s homes are built using wood.

‌An analysis from the National Association of Home Builders (NAHB) reveals that the price of lumber has increased enough to raise the cost of the average single-family home by almost $36,000. According to NAHB experts, these increases “threaten housing affordability across the nation.” Lumber, like steel, is not expected to become any less expensive in the near future.

Copper As an Eco-Friendly Solution‌

Copper shortages have proven significant in the midst of the 2021 economic recovery. These are sparked not only by the increases in demand hitting all building materials but also by the lure of green technology. Copper is a core component in today’s hottest fuel-efficient cars and is also vital for building electricity networks.

Predictions from BloombergNEF suggest that this will be a long-term phenomenon, with usage rates expected to nearly double by 2050. This could pose a problem for home construction; the Copper Development Association Inc. estimates that the average single-family home includes 439 pounds of copper, most of which is relied upon for building wire and plumbing. As with lumber and steel, reliable and affordable alternatives can be difficult to obtain.

Resin Shortage 

Lumber and copper are just two of many materials starting to experience significant cost increases. Resin is also in short supply. While prices have been trending upward for some time, Esteban Sagel of Chemical and Polymer Market Consultants refers to the unprecedented winter storms that hit Texas in February 2021 as “the straw that broke the camel’s back.” According to Sagel, this situation is likely to continue for, at a minimum, another few months.

Resin is a key component in several housing essentials that would typically be thought of as affordable but are becoming surprisingly costly. This is true of vinyl siding, which, according to the HomeAdvisor 2021 True Cost Report, experienced a year-over-year price inflation of 16%. Hence, new builds involving creative solutions may still be more expensive than they were in the past.

General Demand for New Homes‌

Beyond the individual costs of materials, rising prices for new builds are largely fueled by the general lack of supply for residential properties. 

According to Freddie Mac, the U.S. housing market is currently an astounding 3.8 million single-family homes short of what would be required to meet the nation’s current demand. Shortfalls have existed for some time but have accelerated significantly during the past two years. Such shortages are particularly noteworthy among entry-level homes.

Low interest rates play a key role in rising demand, but many other factors are also at play. Millennials, for example, are largely responsible for the increased interest in entry-level homes, as many are eager to relocate from urban settings to the suburbs. This desire is especially common among those who are ready to start families of their own.

Recent changes in work patterns may also play a role. More people are working from home — and more desire comfortable, attractive locations under the assumption that they will spend far more time at home than they did in the past.

While some drivers of high home prices may shift, the Millennials’ desire for stability is expected to pick up steam. Meanwhile, Baby Boomers aren’t willing to leave the comforts of single-family homes just yet. Many are happy to downsize to smaller, more manageable properties, while others prefer to reside in multi-generational households. As multiple generations compete for homes that are already in short supply, prices are bound to increase.

Why Are Interest Rates So Low?‌

If there’s a source of solace amid the chaos of the housing market, it’s the shockingly low interest rates available for today’s mortgages. These represent both the cause of and the solution to today’s greatest housing concerns.

‌Interest rates fluctuate considerably over time, with the Federal Reserve often using them to stimulate economic activity in the midst of a downturn. 

Even prior to the pandemic, interest rates were significantly lower than they had been in past decades — although they began to creep up in 2018. At the time, the Federal Reserve set target ranges of 2.25% to 2.5%. This represents a huge dip compared to rates that regularly exceeded 10% in the early 1980s.

Federal Reserve Chairman Jerome Powell expects interest rates to remain low for some time, although this largely depends on how long it takes for the economy to fully recover from the COVID-prompted downswing. In an interview with NPR, Powell explained, “However long it takes, we’re going to be there. We’re not going to prematurely withdraw the support that we think the economy needs.”

Financial fears prompted the Fed’s actions, but many people have actually seen their income and savings increase during the past year. As such, they are well-positioned to become homeowners even as prices increase. Low interest rates, combined with stable income, may convince many to take the leap.

Weighing Construction Costs Against Low Interest Rates

In principle, the idea of low interest rates may seem promising. This is particularly true among those who have previously dedicated a significant chunk of their mortgage to interest. Under the right circumstances, low interest could spell huge savings over time.

Still, given the realities of the booming real estate market, not all people feel that the current interest rates can offset the increased cost of construction. After all, it’s often easier to conceptualize immediate expenses than it is to understand the long-term effects of interest.

This may explain why some people walk away from promising opportunities at the mere thought of bidding over the listing price. Faced with an immediate increase of a few thousand or even tens of thousands of dollars, they may forget that low interest rates promise to save them far more over the course of their mortgage.

Of course, regional considerations must be taken into account. In some areas, the cost of renting remains more affordable than that of owning a house. This is common in certain urban areas, where, even during a pandemic, rentals may provide unique advantages that keep people from buying homes. In other regions, however, buying provides huge financial advantages over time. The TriState area, for example, is prime homeownership territory.

Putting Low Interest Rates Into Action

To help you make sense of the many concerns mentioned above, we’ve highlighted a basic example of how interest rates and new home construction costs may impact housing investments. We reference not only short-term expenses but also the big picture of homeownership.

Our illustration centers around the Aspen plan — a lovely option well-suited to the needs of first-time homeowners. Currently listed at $229,950, this three-bedroom, two-bathroom house cost just $169,950 in October of 2019.

As a 2,011 square foot home, this put the cost of the Aspen at a reasonable $93 per square foot in 2019, compared to $114 per square foot in 2021. A few years ago, however, the average interest rate was approximately 5%. It’s not difficult to imagine rates returning to this level as the economic recovery takes hold.

Now, with an average interest rate hovering around 3%, it’s possible to pay $969 per month on a 30-year mortgage, even without making a down payment. In late 2019, however, a higher interest rate would have pushed that monthly payment up to $1,004. Despite the house costing over $42,000 less at the time, today’s buyer can get in on the housing market for a lower monthly investment.

These savings may be even more significant for larger homes such as the Cottonwood, Cherry, or Olive. While these properties face similar concerns regarding construction costs, they aren’t experiencing as much demand as starter homes. As such, it may be easier to take advantage of both low interest rates and relatively stable listing prices. If you’re ready for an upgrade after locking in your previous property at a higher interest rate, it might be worthwhile to get a new house instead of simply refinancing.

With TriState single-family rentals regularly exceeding $1,000 per month, it’s easy to see the benefit of buying a home, even if the current real estate market feels a bit overwhelming to navigate. While some aspiring homeowners feel more comfortable riding out the current housing boom and waiting for prices to come down, an eventual rise in home interest rates could make stalling a huge mistake. Those who risk higher-than-average interest, in particular, would be well-advised to take advantage of low rates while they can.

There’s no easy answer to the conundrum of low mortgage interest rates versus the higher than typical cost to build a house. These factors are volatile and can be difficult to track. With that being said, prospective buyers tend to focus on the immediate cost of new builds without considering the potential for long-term savings prompted by historically low interest rates. With careful calculations and a strategic approach, however, you can bring your vision of the perfect home to life — all while coming out financially ahead.

Next Steps

If you’re ready to get in on the exciting housing market, let Reinbrecht Homes serve as your trusted guide. In nearly two decades of home building, we’ve seen it all — and we’re prepared to help you navigate the current realities of residential construction.

Contact us to learn how you can make the most of today’s exciting opportunities. We’d love to help you realize your ultimate dream of living in a beautiful structure you’re proud to call home.

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