As buyers, sellers, and every economist attempts to figure out how much real estate prices will rise in the future, one consideration should be placed above all others. It’s not rising interest rates, the increase in the number of homes sold, or the strong economy and improving unemployment.
At the end of the day, the primary consideration should be; what does it cost to build a new home?
It’s a simple matter of supply and demand. On the demand side, the population in the U.S. is expanding, leading to many more new households. On the supply side, fewer new homes have been built over the past 6 years than what is needed to keep up with the growing population.
Although this may not be a big problem today, this bubble will eventually burst. As the economy has improved, the cost of building a new home has risen. When labor costs, material costs, and land costs rise, builders have to raise their prices to make a profit.
New homes generally cost between 12 and 20% more than existing homes. For example, when a builder has to pay $20,000 more for a home, existing home prices will usually increase by the same amount.
Every buyer should pay close attention to how much new home prices have recently increased, and how much they’re expected to increase In the near future. This is just a simple matter of visiting a model home center and asking the builder how much they expect prices to rise in the near future. Buyers can expect existing home prices to rise by the same amount.