What factors affect the price of new homes?

Location, governmental permits, impact fees, development and design costs as well as land, labor, materials, and marketing costs, all affect the price of a new home.
 
Let’s dive in and find out how each of these factors adds to the bottom line.
 
Now that you’re ready to purchase a new home, how do you choose a home at your price point? If you’re like most of us, you want the most home you can get for your money that includes all the features and amenities you desire. That leads to the question, “What factors affect the price of new homes?”

Location tops any list of new home price influencers

 
Heading the list of price influencers is location. We all know the overused adage, “Location, location, location.” In the Charleston area that means that homes on Charleston’s peninsula whether new or resale, are more costly than those in the suburbs of Berkeley or Dorchester Counties. Why? Because open, buildable land on Charleston’s peninsula is in short supply. Same goes for Mount Pleasant.
 
In a recent news story reporter David Slade wrote about available land in Mount Pleasant, “Planners in what’s been one of the fastest-growing cities east of the Mississippi River are now talking about reaching “build-out” — the point where there’s no more land left to develop — around the mid-century mark.” 

Development costs, impact fees and permits add to a home’s final price

 
Before a home “comes out of the ground” a builder is on the hook for costs beyond land price. These are expenses for things which you are not usually aware of. These include:
 

• subdivision engineering, such as creating the plan that guides the development of the new neighborhood,
• subdivision road grading and paving,
• building permits which are required from local and county governments,
• impact fees to help underwrite the expense of sewer, water and roads,
• water or sewer fees, whether tap-on or connection fees,
• land grading and physical lot creation to transform that old field into a neighborhood of new home lots,
• home plan design to get the required number of home plans designed so that they fit on the lots in the neighborhood.

 
When a builder chooses land to purchase, they must figure each of these items into the expected sales price. According to Fine Homebuilding, “Construction is a cost-based business. You have to know your costs for any given project and mark up those costs by the appropriate amount to determine a price.” Generally, builders have a formula that guides them. Of their final price, they know what amount each of these items contributes.
 
As an example of how fees affect price, in Mount Pleasant the town is charging builders high permit and impact fees and limiting the number of permits available. David Slade reported, “The fees for a single home soared from $1,860 in early 2017 to $6,161 as of July 1 (2018).”
 
Homes being built in the undeveloped outskirts of Summerville, Moncks Corner and Goose Creek are generally more moderately priced because the land costs and impact fees are lower.
 
Dorchester County charges a sewer Impact Fee of $2,600 per Equivalent Residential Units (ERU) and a connection fee based on the diameter of the connection.

Roads and infrastructure impact a home’s selling price

 
Developers frequently build roads within their new neighborhoods and may turn these roads over to the county or the city in which the development is located. However, this work doesn’t cover any costs the local government has to improve roads or access into a neighborhood. This is one reason why the government charges developer impact fees.
 
In communities such as Mount Pleasant which are growing and outstripping local service capacity, permit fees are assessed at a high rate and permits restricted in number to allow the government to keep up services and control development. However, it does not always work that way. Pent-up demand and restricted access can push up prices, forcing potential buyers out of the market.
 
Builders must take the raw land they purchase and install utilities, grade lots and develop them so that drainage is proper and so that homes will be well situated into the site. Next, the builder must have an architectural plan for the home they will build on the lot.

How home buyer tastes and styles impact home construction costs

 
Your preferences as a buyer impact what builders construct. Five years ago, many buyers wanted homes with a locally inspired design, so we saw numbers of Charleston style homes being built. But a builder cannot simply pluck a home design off the internet. They have to have fully rendered plans for not only the space layout, but for all the electrical, plumbing and internal fixtures and fittings. And because what buyers want is not static, plans developed years ago, are not necessarily current today — so plans are not frequently reused from neighborhood to neighborhood. In the last few years, Arts and Crafts design and now mid-century modern designs are really popular, so expect to see these style influences in homes under construction. A decade or more ago, formal living rooms were popular, now flex space is. From inside to outside, your taste directs what a builder constructs.
 
When a builder has all their land development, permits, fees and infrastructure and home floor plans designed, they then must construct your new home.

Home construction expense is impacted by a number of factors

 
Everything from interest rates to the cost of materials used to build your home fluctuates constantly.
 
At the end of 2018, for acquisition, development, and construction (AD&C) loans, builders were paying between 5.25 percent to 6 percent. Earlier in 2018 it was slightly higher. Higher interest costs impact the final price of a new home. The longer the builder has to pay development or construction interest, the lower the profit they may earn.
 
2019 has helped builders a bit because prices for materials have come down. According to Eye On Housing, the National Association of Home Builders Discusses Economics and Housing Policy blog, as of February 14, 2019, “Prices paid for inputs to residential construction (goods) increased 1.6% over the 12 months ending 2019, providing some relief relative to the 4.8% increase builders experienced between January 2017 and January 2018.”
 
Your home builder is always working to keep within the allowances (the money allocated per scheduled item or category) they have computed and upon which the sale price is calculated. Sometimes they can save money by switching suppliers, or by signing long-term buying contracts with suppliers which allows them to lock in a price for materials. The bigger the buyer, the more they are able to negotiate prices in advance and keep prices of your home stable.
 
In boom times, labor demand affects the price builders pay those who work constructing new homes. In the last few years, so many new homes have been under construction that there has been a shortage of labor. There are more unfilled jobs in construction now than there were before the Great Recession. Eye on Housing wrote, “The overall trend for open construction jobs has been increasing since the end of the Great Recession. This is consistent with survey data indicating that access to labor remains a top business challenge for builders.” The inability to fill open jobs has caused labor prices to rise. And that means that it is taking longer to construct homes, which pushes the timeline and increases construction loan interest expense.

 

The structural options and finishes you select affect your home’s price

 
Many builders offer homes with structural options that come with price increases. Want a FROG (Finished Room Over the Garage)? Then that is going to cost you more. If you want both a freestanding tub and a luxurious walk-in shower, usually you can get that in your master bath, but there is a cost for it. As you review builders, neighborhoods and plans, look for builders who give you all of what you want in their standard construction package as opposed to restricting your preferred features to upgraded options; though be advised that you will pay more for more luxurious features.
 
Granite countertops have become almost standard in many new homes. But hardwood flooring or luxury vinyl planking might be upgrades for many new homes. Flooring is often a place where you may spend more money, and therefore up your sales price. But sometimes getting what you want in the beginning is worth the price.

Marketing and overhead costs impact a homes’ price

 
If a new home builder wants to increase buyers’ awareness of what she has for sale, she has to advertise. Marketing may include using social media or print publications like New Homes Guide which inform buyers. While many people think social of media is free, the costs of personnel to manage social media and creative materials to share as posts are significant. Directional signage, sales materials, flyers and promotional products each must be paid for. Ultimately, these expenses — just like offices, phones, and equipment — are part of the operating overhead that every home builder bears and which are factored into the price at which new homes are offered.

Is there a price advantage to purchasing new construction?

 
The Charleston Trident Association of Realtors reported that for 2018, new construction homes sold for 99.5 percent of their asking price as opposed to 95.8 percent of asking price for resale homes. There was a slightly larger volume of new homes available for sale at 3.9 months’ supply for new construction as opposed to 3.2 months for resale.
 
There are some clear advantages to purchasing a newly built home. New construction homes are more energy efficient, have current design and floorplans, and comply with the most current building codes. They come with warranties on a majority of their components from structure to appliances. And if you choose an inventory home you can have both the delight of moving in quickly and the no-one-has-lived-here-before advantage.

What is the cost disadvantage of purchasing an existing home?

 
Will Jenkinson with Carolina One New Homes says that comparing the purchase of a new construction home to the purchase of an existing home is “not comparing apples to apples.” He explained that there is a cost to a resale home whether it is adding in structural wiring or installing on-demand hot water heaters or new window treatments or interior paint. He advises buyers to look at their costs for the first 2-5 years when comparing the purchase of a new home to a resale home. “Look beyond your monthly mortgage payment. Ask yourself, ‘How much am I spending on monthly expenses?’” The expense to operate an older home may not be as efficient as a brand-new home which may have a brand-new HVAC system with a higher SEER rating.
 
Jenkinson notes that “at ten years, things begin breaking.” So, like an older car, an older home is going to have some wear and tear and obsolete items that need updating. Buyers of resale homes need to consider the “trouble factor” associated with making the modifications they want or repairing or updating.
 
Resale homes may not offer the floorplan you want, or the finishes you desire. However, on the plus side, you don’t have to wait for the house to be constructed and you can do any remodeling at your own pace. Not only that, but the expense of new curtains and landscaping may already be covered in an existing home.
 
Realtor Holly Hamilton says she tells her buyers, “It is really worth noting that the preowned homes often have had extras done over the years like the brick patio added later or the closet upfit or the bathroom fixture renovation.” These are great if you like the features and selections of finishes in a resale house, because if you don’t like them, you’re going to be remodeling.
 
It is easy to comprehend the advantages that new construction offers. And after reading this article perhaps you have a greater appreciation of the factors contributing to the price of your new home. Use this knowledge to choose your home from a neighborhood in the greater Charleston area that gives you exactly the home you want at the price you can afford.

 

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