What is the $/sqft to build a house, and why is the range so big?
In the early 2010’s, after the initial recovery from the sub-prime mortgage crisis, the cost to build a new home rose steadily at approximately 3.7% year to year. But then in 2020, a few months into the COVID pandemic, the market did the exact opposite of what most economists expected and high inflation set in.
As a builder, this was both exciting times and terribly troubling. The construction leads were coming in at an unprecedented rate and it seemed everyone wanted to build a new home or renovate their existing home. On the flip side though, we had many homes under construction with negotiated prices and our cost of materials was skyrocketing. Homes we were supposed to make a reasonable profit on, we were lucky to break even. We had lumber packages delivered one day, only to find out the next day someone had stolen 3 pallets of plywood (no kidding). A pallet of plywood was like gold with the huge swings in commodity pricing.
We, like most other builders, quickly migrated from fixed-bid contracts to cost-plus contracts. This took most of the immediate risk off of our business and moved it to the home-owner. This sounds crappy, but it was the only way to conduct business and continue to build homes. We did our best to estimate a customer’s budget and prepare them with ample contingencies, but the prices kept increasing. A budget prepared one day was meaningless 6-9 months later. And it’s not uncommon for a budget & contract to be executed 3 months or more before breaking ground. As a builder we did our best to help our clients however we could, but it was a struggle for sure.
The below chart shows the average range of custom homes from 2013 to 2023. Fortunately, we saw the market pressures ease in 2023 and pricing start to level out. Now although the $/sqft is once again pretty stable, it’s now 32% higher than it was in 2020 before the madness.
As of the writing of this article, custom home buyers can expect to spend from the low $300s to low $400/sqft. That’s a big range! What are the major factors impacting the multiplier?
The first place to start is the land. If you are building a home in a neighborhood with utilities at the street, your costs are going to be much lower than building a home on 5 acres in the middle of nowhere. The home on 5 acres is going to need a septic system, water source (likely potable rainwater or a well), propane (if desired) and a potentially long run of electricity. This could mean $75K or more in additional expenses than building in a neighborhood.
Still on the topic of the land is the terrain. A flat lot with the build site cleared of trees is the best-case scenario. Building on the side of a cliff is the worst-case scenario. Most folks end up somewhere in between, but the cost of the site prep, driveway, environmental controls, etc. can be quite costly. A custom design suited for the land can go a long way to minimizing the cost of building.
On the topic of design, a rectangular box is the cheapest design, but who wants to live in that? If you are designing a custom home, you want it to be a reflection of your family and how you live. If money were no object, we’d all get pretty creative in this regard. As it turns out, design is one of (if not the) biggest influencer of $/sqft. This could mean the difference between $350/sqft and $500/sqft. Walls of windows, structural steel, and butterfly roofs are not cheap…
Selection of finishes are the last major bucket, and the one the homeowner has the most control. The quality level of your drywall, the style and color of your roof, the window manufacturer are all examples of this. Appliance packages can range from $10K to $50K. Cabinets from $15K to $150k.
Below are a couple of scopes that reflect the ranges dictated by design and preference. Drywall typically ranges from $6-10/sqft. The low end being a level 2 or 3 (Monterrey drag or Heavy Orange Peel) $10 being a level 5 smooth with 12-foot ceilings. Stucco typically starts off around $10-11/sqft for a standard application. Homes with a lot of different reveals and special details will land closer to $15/sqft. Framing packages are mostly driven by architectural design but typically range from $10-18/sqft.
Hopefully this gives a bit of insight into the large variations in cost to build. And also, the value in understanding your cost drivers as you work towards designing your dream home.
