Real estate rules and principles are almost never one size fits all. A home can be bought at a specific price one year, and then fluctuate greatly just a few years later. The exact same home can be sold in one neighborhood at a certain price but sold for an entirely different price just one neighborhood over. The differences increase when extrapolated to another state or region. This is true for resales but is also true for brand new construction. There are many contributing factors. The major variables that affect your real estate market are land costs, construction costs, and supply and demand. Here is a quick look to see how those are impacting the US.
According to the Lincoln Institute of Land Policy, the price of land can account for 5%-79% of the total cost of residential housing. Depending on what state you live in, the land cost can have a significant impact on your home’s value and/or the price range of your future home. The most recent data (First Quarter of 2014) shows Washington DC having the highest land share percent of nearly 79%. Owner occupied home values in DC average $880,000, with a structure replacement costs to be $187,000, leaving a land value of $692,000. For comparison, Virginia home values average $304,000, structure replacement costs to be $237,000, leaving a land value of $67,000 (22%) land share. Nobody can make new land, so depending on where you live, you could pay a large premium.
Looking at all the data, it appears that the highest priced land is out West. Particularly the Pacific Region; Hawaii, California, Oregon, and Washington to name a few. Land in the South (with the exception of the South Atlantic Region) tends to be some the lowest priced land. Oklahoma, Missouri, and West Virginia round out the bottom. The middle of the pack just so happens to be the Midwest. Whereas most of the New England Region are on the low side, the two outliers are Connecticut and Massachusetts.
When it comes to new construction, land must be purchased, and the price the builder pays for the land is one part of the equation. Another big part of the equation is how much the builder will spend to construct the home. Labor costs and material costs contribute to the construction expense. According to the Davis-Bacon Act, the minimum amount paid to laborers differs across the US. San Francisco has one of the highest land values and an increased labor minimum of 29% above the national average. Washington DC, however, also has a high land value but it’s labor minimum is only 5% above national average. Miami, Baltimore, Atlanta, and Dallas are just a few of the metropolitan areas where minimums are actually below the national average. How much a builder spends to find skilled laborers will alter the sale price of a newly constructed home.
The cost of construction materials changes constantly. Just this month, lumber increased by 1.2% while cement/aggregate dropped 0.5%. Builders must fine tune their numbers constantly to account for the ebbs and flows of material costs. Additionally, some materials can cost more in various parts of the US. The same home, built by the same laborers, on an equally priced lot, can cost thousands of dollars more in certain cities than others.
Sometimes, homes may be sold at an extremely high price point just because they can. The real estate market is a very tangible example of supply and demand. There’s a limited amount of land, a quantifiable selection of homes that are ready to move-in, and a ton of people who who need homes. Builders and developers take unique advantage of these opportunities. There are almost always lot premiums, higher costs at the end of a phase/selection, limited opportunities within a neighborhood, etc. Whenever things are selling well, the prices will keep going up. According to Forbes, Boston, Dallas, Nashville, and Raleigh are just a few of the markets that are predicted to be especially “hot,” this year.
Depending on where you live, new construction may be more affordable than you might think. Consider land costs, labor costs, construction costs, and supply and demand. Evaluate what you’re paying for in order to make the best informed decision as possible. If you’re interested in checking out what’s near you, be sure to browse the for sale section of Homes.com. How do your new homes compare to similar resales?