How Much Does New Home Construction Cost?

How much does new home construction cost? Are single-family detached homes more expensive to build than single-family attached homes? Is "attached" housing the future for new home construction in Tallahassee?

These are some of the questions that came up when I had a good, long discussion with a local homebuilder on Monday. Today's post is my attempt to answer these and a few more questions about the cost of new home construction in Tallahassee.

Before we get to my answers, let's take a look at the new homes currently listed for sale in the Tallahassee MLS.

New Construction Homes For Sale

Information Source For New Construction Homes

The source of the information for today's report is the Tallahassee MLS. This means that we have not captured 100% of the new homes sold in Tallahassee, but my rough calculations tell me it's about 80% of the market.

All the reports use the median (middle value in the measurement), thus I suspect these results would hold were we able to accurately assemble the entirety of the new home sales market.

I will not be commenting on condominiums from this point on, as there are too many reasons that the condominium information is lacking (for example, a nearly new home like this has been built and sold as a condominium unit, but so too is this unit that is actually within an older building and yet is marketed and sold as "new."). How do you really compare a unit on the 6th floor in an older downtown building with a brand-new "unattached" home in NE Tallahassee?

The relatively few numbers of new condo sales plus the wide array of what has been built as condominiums, combined with a varying definition of "new" makes the analysis of new condo sales very murky.

Median New Home Prices

The first of our six graphs in this report shows the median new home price for both attached and detached housing. Single-family detached homes are shown in red, townhomes are shown in blue, and condominiums are shown as dashed lines.

The first thing I notice on the median new home price graph is that new single-family detached homes and new townhomes sell for very close to the same amount each year.

The reason that the prices are so similar is due to the fact that builders are trying to deliver a product that consumers can afford, and right now that sweet spot is right around $300K. With land prices rising along with the increased cost of construction, sweet spot or not, we will see this median rise.

Median New Home Values

When we look at value (or in the case of new construction "cost"), we see that there has been very little difference between the attached and detached costs for builders.

Unlike the median home price that has plateaued over the past few years, builder costs continue to rise.

Did you know that the minimum wage has risen more than 50% since 2005 (the end of the previous housing market expansion?). With many States pushing to increase (significantly) minimum wage, I just see no future where building a home is less expensive than it is today.

I occasionally run into a buyer who thinks he can build a home cheaper than what can be purchased from the existing market, but it does not take long to convince him that he is wrong. It costs more today than ever before, and we'll make that statement continuously into the future with rare exceptions.

Sure, we may have a market in the future where supply gets out of hand and builders might have to liquidate some homes below cost (as in 2007 through 2009), but actual costs are only going higher.

Median New Home Size

The previous two graphs showed stable prices combined with rising costs, thus the next graph shows that homes are getting smaller, 

The only way that builders can deliver homes at prices consumers would like to pay is to make them smaller and/or put them on smaller pieces of land.

Tallahassee is going in the direction of all other metropolitan areas that grew into larger markets. Gone are the days of getting large cheap houses close-in to town! Ultimately, Tallahassee is going vertical to squeeze as much home out of the shrinking land parcel beneath it.

We will continue to see more two, three (and more) story homes being built on the rare lots that can be found in many existing neighborhoods. While many people will believe that "this won't happen in Tallahassee," they will find out it to be true.

The next three graphs in our report demonstrate the difference between new and used homes, and what we should expect their impact to be upon each other.

New Homes Versus Existing Homes

The final three graphs in today's report allow our readers to visually compare the median home price, the median home value, and the median home size of new homes versus existing homes.

The color red is used for single-family detached homes, while the blue color is used for townhomes. Solid lines represent new home sales, while dashed lined represent existing home sales.

Median New And Existing Home Prices

The median price of homes in Tallahassee is on the rise, but thanks to incredibly low mortgage interest rates, home affordability is not suffering (yet).

When I look at the median home price graph above, I see a plateau occurring for new homes, yet continued appreciation for existing homes. Does this mean we should expect to see existing homes begin to form a plateau?

Definitely not. And it really has nothing to do with what we're seeing here. Instead, just take a look at our most recent report on supply & demand for homes in Tallahassee.

Demand remains strong, relative supply is the lowest we've seen in the past two years and there just aren't enough homes for the bottom 95% of the Tallahassee real estate market.

This means we need to build more, and we've already addressed the fact that the cost of new homes is rising.

The value (cost) graph is very telling. Median home values are pushing higher, in both new homes and existing homes too. As stated above, the under-supply of homes is forcing buyers to compete for limited opportunities, and it is causing property valuations to push higher at a higher than traditionally normal rate.

The rising cost of new construction in a high-demand but limited-ability market is creating a whole new dynamic that began a few years ago. The market demand is asking for new homes, but single-family homebuilders cannot build at prices the majority of the market is seeking.

Notice how the median new home size continues to drop, yet the median existing-home has pretty much stabilized at a plateau for the past ten years.

This is the new dynamic in the market. New homes are getting smaller, but buyers (generally speaking) do not want smaller homes. What do you think this is doing for the current and future appreciation rate for larger homes on larger lots?

Buyers today are fixated on the interior of homes more so than at any time during my nearly 30-year career (see How HGTV Is Like Meth For Homebuyers). But this is just a cycle, and cycles change. Over time, it's the land that holds the value in the home, not the interior modifications which eventually become dated.

I expect to see several significant changes in our housing market over the next ten years:

Our market will go vertical - Expect to see more attached homes and vertical housing. Multi-family buildings with four, eight, and perhaps even more will hit the for sale market, while apartment construction will be higher for the next ten years than it was in the previous ten. Demand for housing will continue to increase with our slow but steady population growth, so multifamily solutions will be critical because single-family homebuilders won't be able to deliver a product for the lower 2/3rds of the market.

Larger, low-priced homes are like gold. Can you imagine buying a 2,400 square foot home in a great location around San Francisco? New York? Chicago? Those homes would sell for millions of dollars. But today, you can buy hundreds of 2,400 square feet and larger homes in Tallahassee for less than $500K (see the list here). These homes are irreplaceable and will appreciate faster than will the overall market.

Counties surrounding Leon will absorb more of the lower-end - It's more expensive to build and develop in Leon County than it is in the surrounding counties. Builders have moved to Wakulla, Gadsden and Jefferson County to bring excellent homes to the market at prices far below where Leon starts. This trend is going to continue and will expand.

Those are the major trends coming our way in the Tallahassee real estate market.

Recent New Construction Home Sales In Tallahassee

The following table shows the 1,000 most recent new home sales in Tallahassee and includes the price, value, and size of each new home sold. If you ignore the condominiums, you'll notice how high the asking (cost) has risen. Each column header can be clicked to re-sort the table in any manner that you like.