Why are homes costing more?

by Andrew Szalay, Habitat executive director

If you considered buying a home recently, you may have noticed that homes are more expensive today than they were a several years ago. And, if you own your home, you might wonder—for the price of a new home—if it is even worth selling your old one.

Today in Lancaster and Lebanon Counties a homebuilder cannot build a new home for less than $300,000. For home sales, including older homes, the average home listing price has reached an all-time high—also $300,000, according to Realtor.com’s Housing Trend Report. 

So why are homes costing more? There are a number of reasons, but we can consider them under three main themes:

Scarcity

There are fewer homes to buy and fewer homes being built. This pushes the prices up. Current homeowners are not willing to move, because their housing condition will not improve with the purchase of a pricier home on the market. In addition, the usual trends of household formation (traditionally through getting married and buying a home) and older households downsizing are not happening. Household formation is happening later in life and retired households are opting to stay put. Lastly, the homes being built are luxury homes, which are typically the only profitable homes that builders can afford to build. 

Purchase Power 

When interest rates are low, homebuyers can afford to pay a little more for their purchase than if interest rates were higher. Interest rates in 1986, when Lancaster Lebanon Habitat for Humanity was formed, was between 10 and 11 percent. Closing out 2019, mortgage rates were under a mere four percent, leaving homeowners more money to buy more home. However, the downside of a lower interest rate in the middle and higher ends of the housing market is that it pulls the prices of formerly affordable options higher. When you combine low interest rates with a homebuyer with good credit, it’s likely that the price will beat the asking price or greater.

Building Requirements 

Adding new homes to the market would help alleviate the pressure on home prices. However, the cost of building a home is costlier than ever. There are many reasons for this, including planning costs, environmental infrastructure, materials, the cost of skilled labor, and special expenses required if government funds are used. All homebuilders, including Habitat, must contend with this reality.

So how much does it cost Lancaster Lebanon Habitat to build a house? In 1986, we could build a home for $50,000 to $80,000 when the average sales price was $104,000. At the end of 2019, when the average home price was $350,000, a Habitat home would cost approximately $150,000. It’s a fact our donors, volunteers and supporters are very proud of, and will strive to maintain.

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