Building vs. buying a home

jack-o-lantern

jack-o-lanterns: very residential

Abstract:

Buying an existing 1,000-square-foot home saves $17,500 over the first ten years of ownership compared to building a new one.

Intro:

I’ve often wondered: would the energy and maintenance savings on a new home be worth the added construction costs versus buying an existing house?  Financially speaking, the answer turns out to be no.  On average, a 1000 square foot new home will cost $17,500 more over the first ten years of ownership than an existing home of the same size.

Of course, housing is usually a bad investment, and thinking of a home as an investment rather than an expense might not be the way to go.  We eat more than just rice and beans at my house because food isn’t strictly a financial decision.  It is more complex, just like housing (how to put a value on that new car house smell).

streetlight

Looking at housing as an expense, it might indeed make sense to build that new home rather than buy a moth-balled oldie.  There is the possibility that having more control over building materials, energy efficiency standards, location, design, layout, etc. would more than makeup for the additional costs of building new.  Heck, really being intentional about energy efficiency (LEED, passive house) and reclaimed materials might indeed make building a new home the better financial decision to boot (but don’t forget about the inevitable construction process headaches).

So that’s my disclaimer.  I’m using high-level averages and simply looking at this as a one-dimensional financial decision.  Financials are just a piece of the puzzle, although hopefully an important one as housing expenses account for the largest share of most people’s spending.

The numbers:

For this example, I’m simply comparing the costs of buying an existing 1,000-square-foot home new vs. used.  Like my article last week comparing bigger and smaller homes, this example uses many similar assumptions:

  • 1000 square feet home (personal preference, less is more)
  • $80 per square foot for building new home (Census Bureau)
  • $56 per square foot for buying existing home (Investopedia, Tallahassee MLS)
  • 20% down payment (estimate)
  • 30-year mortgage (estimate)
  • Monthly insurance, tax, and mortgage payment of $446 on new home (Zillow)
  • Monthly insurance, tax, and mortgage payment of $332 on existing home (Zillow)
  • Annual maintenance and utility costs of $1,490 on new home (NAHB)
  • Annual maintenance and utility costs of $2,120 on existing 1960’s home (NAHB)
  • One-time $5000 furnishing expense (estimate)
  • 3.5% closing costs (Zillow)
  • All “savings” invested in stock market, earning 4% real rate of return (part of model)
dog storm

enough with the assumptions already!

Pushing these assumptions through the ROI model yields the following investment statistics:

  • 10-Year NPV: $17,564
  • 10-Year ROI: 22%
  • 10-Year Payback: 0.8 years
roi - buying new vs existing home

click for link to live spreadsheet

chart - buying new vs existing homeFrankly, $17,500 in savings over the first 10 years is a little lower than what I was expecting given the strong returns on having roommates and buying a smaller house, but $17,500 is a significant sum on its own, representing almost 30% of the original value of the $56,000 existing home.  And for someone with a bigger family and/or taste for larger homes, the value of buying an existing home rather than building only gets stronger as house size increases.

Conclusion:

While it doesn’t always make sense to think of homes strictly as investments, housing is by far the largest expense in most Americans’ budgets, and deciding to buy an existing home rather than build a new one can save a lot of money.

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Comments

  1. Thanks for the information. I have often wondered the same thing about building a home vs buying one, especially since I know so many people who are currently building. I will definitely keep this in mind when I decide what housing I will choose for myself. I am wondering, though, how would buying an already built new house compare with building a new house? Is there a difference?

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