Benefits of Building Your Dream Home During Uncertain Economic Times | Guest Post

Recessions impact people personally, with some taking a bigger hit than others. Before building a home during a recession, buyers should consider their job’s stability, including how dependent their income and finances are on the broader economy.
Nicole Rueth

As of mid-November 2022, the real estate market is “quiet.” Higher interest rates mean financing capital is more expensive, pending home sales are down, and active inventory is up, but it’s still lower than past years.

Despite the lukewarm conditions, home prices remain high in many markets. According to National Association of Realtors® data, home prices gained in the third quarter of 2022 by 8.6 percent, compared to the same period last year with 181 out of 185 metro areas noting increases. However, organizations such as the California Association of Realtors® see prices in the high-cost state dropping in 2023, with the group predicting an 8.8 percent price reduction to a median price of $758,600.

Putting pressure on buyers and deflating demand is a rise in mortgage payments. The monthly payment for a single-family home jumped to $1,840 with a 20 percent down payment, a number 50 percent higher than the previous year. Higher costs and lower inventory combine to make it a challenge for buyers to find their dream home.

Challenges Finding the Right Home

There are always buyers looking for a home. Life changes and opportunities happen regardless of the economy and in a market like this, it just happens at a slower pace. After years of a hot seller’s market where homes in some areas received 30 same-day offers well above asking, buyers now have more negotiating power. However, the challenging market conditions due to limited inventory and high interest rates mean buyers need to search longer and in a broader range to find their “dream home.”

Buyers in late 2022 and into 2023 face several challenges. They’re encountering available homes that are often stale and have sat on the market for a while due to a of myriad reasons, including mispricing, a lengthy list of needed repairs, or the home is difficult to show. There are new listings coming out, but it’s at a slower pace due to higher interest rates and the weak holidays home buying season. Sellers are also less inclined to sell if they don’t have to for financial or employment reasons because they’re not seeing the red-hot demand from the prior years.

Great homes that show well, have minimal repair requirements, and sit in great neighborhoods with quality schools will still sell quickly and command above asking offers. Some buyers will consider building a new home as they confront the challenges of outbidding others for a perfect home and not wanting to settle for the stale home.

Building a Home – Pros, Cons and Financing Options

There are still opportunities to purchase a lot and build a home as an alternative to not finding a desirable home in the current market. Building a home is a surety and doing so, in an uncertain market, gives buyers the comfort and control of securing a home that checks all of their boxes.

Here are some of the pros of building a new home within the current market conditions:

  • You can build what you want and are not limited to low inventory.
  • Flexibility in the timing of financing, where you can do a construction loan with a two-time close because interest rates will likely fall in the coming year or two. ·
  • The prices of raw construction materials are slowly falling due to supply chain issues resolving.
  • A recessionary period could mean an oversupply of skilled labor will then mean builders and contractors offer lowered prices for construction and finish work.
  • New homes are new. Materials, plumbing, electrical, and other components fail less often because they’re in mint condition.

However, there are several cons to building a home:

  • It’s a stressful process that costs time and patience, which can take buyers away from other important parts of their life.
  • Building a home takes time, which can mean additional costs for renting during the construction period. These costs increase if there’s unexpected delays due to materials problems.

When a buyer weighs the options and moves towards building a home, they then need financing. There are several options for land loans and for construction loans.

With land loans, buyers can make a purchase with up to an 80 percent loan-to-value. The property does not have to feature water, gas, or electrical connections, it can be raw land. These loans are typically interest-only for 24 months with the understanding construction will begin within that time. Buyers need ample time to complete the pre-construction process which includes hiring an architect, finding a reputable builder, creating a floor plan, and receiving all the proper permits before shovels are in the ground.

Construction loans are the next step, with the option of a one-time or two-time close. The options for this loan depend on the home’s purpose, whether it’s a primary residence, investment property, or second home. A one-time close is only for primary homes, while the two-time close offers permanent financing at the end of the buying process. The assessed value for these loans comes from a “to be” value and the appraiser’s opinions on comps, as well as specifics of the buildout and any home upgrades.

Building During a Recession

Recessions impact people personally, with some taking a bigger hit than others. Before building a home during a recession, buyers should consider their job’s stability, including how dependent their income and finances are on the broader economy.

Buyers need significant financial reserves and little fears about losing their job, or not finding a new one quickly, during a changing market. The risks with a construction loan are set start and end dates. If a buyer loses their job, they can’t put the construction on pause. It’s not a process for the risk adverse, some people will capitalize on the new build opportunity, but it’s not for everyone.

With risks come opportunity. Consider an investor that wanted to scrape an older undesirable home from a lot they own. But if the investor is self-employed and feeling the recessionary hit, they might not move forward with developing that land. They abandon their plans to build an eight-unit townhome, and instead sell the lot to a savvy buyer at a discount who comes in and builds a $2 million home that fits their every desire. These types of situations give buyers a chance to realize opportunity out of uncertainty ending with the home they’ve always wanted.

The views, opinions and positions expressed within this guest post are those of the author alone and do not necessarily represent those of the Denver Metro Association of Realtors®. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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