Is 2022 a good time to build a custom home?
Our building experts answer 5 of the most asked questions...by Andrew February 2, 2022
Is 2022 a good time to build a custom home?
The answers to 5 of our most asked questions about the housing market.
- Are costs going to decrease in 2022?
- What is going to happen with lumber pricing in 2022?
- Is the housing market going to crash?
- Are interest rates going to increase?
- Where do I find Land to build?
Yes 2022 can still be a good time to build your custom forever home, despite rising costs and interest rates. Building your custom home is an investment in your family’s lifestyle and should be looked at as a long term financial & lifestyle decision of living in your forever home for 5 or more years. Although there are no housing analysts that forecast a decrease in home values, even in the worst case if there was a short term decrease, your home value is most likely going to increase when looked at as a long term investment of 5 or more years.
1. Is it going to cost less in 2022 to build than it did in 2021?
- Building costs increased 19.2% year over year as of April 2022 according to the National Association of Homebuilders (NAHB). Since the start of the pandemic costs have increased 35.6%. The historical average over the past five years has been an increase of under 2% yearly building cost increase. We do not anticipate a decrease in costs 2022 however we anticipate a slowing of the pace of increases after Q2. Overall we anticipate the cost of construction to increase between 5% – 10% this year.
- Chart from @aliwolfecon showing production capacity improvements anticipated throughout 2022.
2. What is going to happen with lumber pricing in 2022?
- Lumber has been extremely volatile to start 2022 and has increased substantially from the lows seen in August 2021. This Spring Lumber stopped 13% short of hitting the peak it did in April of 2021. We expect to see less volatility in Lumber through the rest of 2022, however we expect for lumber to still trade in a range significantly higher than it did Pre-Pandemic.
3. Is the housing market going to crash in 2022?
The trauma the housing industry experienced in 2008 is still fresh in many of our minds. Until that time we have never experienced a crash in housing of that magnitude. The cause of the crash in 2008 was loose financial lending criteria which enabled people to purchase homes they couldn’t afford once the variable rate on their loans increased. Lending standards are much stricter now and the vast majority of loans are conventional fixed rate loans. The strength of the lending standards was seen in the height of the pandemic as there was high unemployment and a low percentage of loans were in default or required forbearance. This is a good sign that we will not experience a banking & foreclosure crisis like we did in 2008 even when a recession does happen in the future.
It is unlikely that we will experience a housing crash in 2022, however we do expect the market cool from the extremely hot markets we have had in 2020 and 2021.
Historically real estate is regionalized, until we had the national crash in 2008. Traditionally, the Sun Belt States (Florida, Texas, Arizona, etc) experience hotter housing markets than we do in Ohio and also cool more dramatically than we do in Ohio. When the housing market cools from increased interest rates the first homes that people stop buying are second homes which are a large percentage of the homes in the Sun Belt markets. We do not have as high of a prevalence of second homes and investors in Ohio, which makes our market more stabilized.
4. Are Interest Rates going to Increase?
It’s no longer a question will interest rates increase, but now the question is how much. The housing market has been spoiled with low interest rates for years. Unfortunately, with the high inflation the Federal Reserve will continue to push rates higher until inflation is controlled. This will continue to put pressure on mortgage interest rates throughout the year. We anticipate rates to climb to around 6% by the end of 2022.
Historically these are still extremely good rates. Most people refinance their homes over the life of the loan so if interest rates were to dip in the future you could always take advantage of lower rates by refinancing. Many of our buyers are choosing to do 5 or 7 year ARMs on their construction loans allowing them to lock in a lower rate until they refinance in the future at lower rate.
5. Where do I find Land for my Custom Home?
- We reported back in June of 2021 that vacant land supply was at the lowest level ever recorded. It has continued to worsen. The supply chain issues and long approval process has pushed out the timeline for when more lots will come on line.
- With Old World being a build on your lot home builder we have noticed the trend of available land for custom homes has continued to decrease since 2008. There are very few new developments that are not controlled by large regional or national home builders. This has made it more challenging than ever for our clients to find traditional build ready lots in subdivisions.
- Most available land for custom homes is now found on non-traditional lots (tear downs, lot splits, large vacant parcels).
Should I Build my Forever Home in 2022?
Our outlook continues to be that if you are ready and able to build then now is the best time to do it. It is anticipated that interest rates will be on a rising trend throughout 2022 and costs will continue to increase, although the cost increases will be at a more normalized rate. It is highly unlikely that it will be less expensive to build in the future.
It is almost impossible to both directionally predict and time the real estate market when purely looking at a home as an investment. However, most of our clients are not purchasing a home purely as an investment and they are building a new home that is going to be their Forever Home. With this in mind we suggest not looking at building home as an investment decision and look at it as a lifestyle decision. If you plan on living in your home for longer than 5 years chances are you will benefit from price appreciation as well as the enjoyment of your family living in your new home during that time.