What determines the price of a new home?

Pricing is one of the biggest factors driving homebuyers in their search for a new house.  And many variables determine how new home builders determine their pricing, it is far from arbitrary.  Neighborhood location, governmental permits, impact fees, development, and design costs as well as land, labor, materials, and marketing costs, all impact the price of a new home.  Let us look at how all of these elements factor in. 

Once you have decided to buy a new home, a critical first step prior to starting the search is to determine your price point.  In general, most buyers want the most home they can get for their money that includes all the features and amenities they desire. That leads to the question, “What factors affect the price of new homes?”

 

The adage holds true: it’s all about location, location, location

Location typically tops the list of factors influencing the price of a new home. The laws of supply and demand are in full swing when it comes to real estate.  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. The same is true for James Island and Mt. Pleasant.
 
David Slade a local reporter wrote several years ago about available land in Mt. 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.”  Available land is a hot commodity in this market, a factor that drives up housing prices in these areas.


 

“Red tape” items like impact fees and permits are expensive

While it is not something that you might initially think about, new home builders have development costs as they transform a native piece of land into an appealing new community. Long before construction on a home begins 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:

 

• Engineering fees for the plan that guides the development and subdivision of the new neighborhood,
• subdivision road grading and paving,
• building permits granted by 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.

All these factors must be accounted for when a builder chooses land to purchase and 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, and they know what amount each of these items contributes to the final price of their homes.
 
Let us look at an example of how fees affect pricing in Mt. Pleasant.  The town of Mt. Pleasant 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 well over $6,000.
 
Conversely, 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 $3,500 per Equivalent Residential Units (ERU) and a connection fee based on the diameter of the connection.

 

Development costs are reflected in a home’s price

When new communities come out of the ground it is typically the developer who build roads within their new neighborhoods and they may turn these roads over to the county or the city in which the development is located. However, this work does not 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.
 
Fast-growing communities, such as Mt. Pleasant, are growing and outstripping local service capacity.  Thus, permit fees are assessed at a high rate and permits are 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, ultimately 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.


 

Style trends determined by homebuyers impacts construction cost

Builders invest heavily in conducting market research to ensure that they can provide what their new home shoppers are looking for.  So, your style and design preferences as a buyer impact what builders construct.  In the past decade, 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 utilize an architect to develop 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 always reused from neighborhood to neighborhood. In the last few years, Arts and Crafts design and now mid-century modern designs are very popular, so expect to see these style influences in homes under construction. Over a decade ago, formal living rooms were popular, now flex space is. From inside to outside, your taste directs what a builder constructs.


 

Numerous variables impact the actual cost of home construction

Markets are in constant flux, impacting everything from interest rates to the cost of materials used to build your home.  At the end of 2018, for acquisition, development, and construction (AD&C) loans, builders were paying between 5.25 percent to 6 percent.  In 2018 and 2019, this trended upwards. In 2020, rates hit historic lows.  Interest costs impact the final price of a new home. Timing is also a factor: the longer the builder must pay development or construction interest, the lower the profit they may earn.
  
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. In the past year they have also faced challenges with supply chains resulting in situations like lumber shortages that drove costs sky high.  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 can negotiate prices in advance and keep prices of your home stable.
 
When business is booming, 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.


 

Your selections for structural options and finishes impact your home’s price

Typically, when you opt to make structural changes offered by many builders there is an associated price increase. These changes run the gambit from additional rooms to upgraded designer baths and kitchens.  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.
 
Based on market trends, builders include popular items that they know most buyers want, for instance, 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.


 

Overhead and marketing affect the bottom line

Advertising is a huge part of the new home industry so that builders can increase buyers’ awareness of what they have for sale. Marketing may include using social media or print publications. 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 all 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 purchasing new construction financially advantageous?

The Charleston Trident Association of Realtors reported that for 2021, new construction homes sold for 101.2 percent of their asking price as opposed to 99.0 percent of asking price for resale homes. There was a slightly larger volume of new homes available for sale at 1.1 months’ supply for new construction as opposed to 0.6 months for resale.
 
Purchasing a newly built home has some clear advantages. 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 many 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.


 

Are their cost disadvantages to purchasing a resale home?

Carolina One New Homes expert Will Jenkinson 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.
 
Continuing the analysis, Jenkinson notes, “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.
 
In addition to considering functionality, resale homes also may not offer the floorplan you want, or the finishes you desire. However, on the plus side, you do not 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 do not like them, you’re going to be remodeling.
 


New construction has some pretty clear advantages in terms of cost and livability.  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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Thank you for reading and sharing our articles from The Greater Charleston New Homes Guide. Our business is to know Charleston, SC's new home construction, home builders, neighborhoods, and homes so we may assist you as you take your new construction home journey. Please take the time to explore our site. The Greater Charleston New Homes Guide is considered the best and most reliable ‘local’ resource to new home construction, builders, neighborhoods, and homes throughout the Lowcountry since 2004.

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