Why Betting on Lower Home Prices Could Be a Risky Gamble

January 4, 2024

Are you patiently holding out for a significant drop in new home prices? It’s a common hope, especially in today’s economic landscape. Let’s delve into the facts and trends to understand why the prospect of lower prices might not be as promising as it seems and why opting for a ‘Cost Plus’ contract could compound the issue.

The Myth of Falling Prices:

Many have been closely monitoring construction material costs, anticipating relief from the relentless surge in new home prices. While there have been fleeting dips in specific material costs, like lumber, some essential categories, such as concrete, continue their upward climb.

Though you might spot occasional fluctuations, zooming out to a year-over-year view reveals a consistent upward trend. In fact, compared to the pre-pandemic era of early 2020, prices remain notably higher. Hoping for a substantial price drop? It’s doubtful and could be mere wishful thinking.

Moreover, market experts, including JLL, a Fortune 500 market advisory services company, predict inflation in construction products to increase between 2 to 6 percent throughout 2024. This inflation alone can have a significant impact on your budget.

Housing Shortage Compounds the Problem:

When it comes to higher prices, another key piece of this puzzle is the housing shortage in the United States. It’s not just a localized issue; it’s a nationwide challenge.

As of 2022, we’re facing a colossal shortage of 3.2 million homes. That’s a staggering 2.5% of the existing U.S. housing inventory. This shortage isn’t a new problem, and it’s not showing any signs of rapid resolution. In fact, it intensifies the pressure on prices, making them even less likely to take a dip.

The Cost Plus Conundrum:

Now, let’s address the heart of the matter. Some might believe they can outsmart the market by opting for a ‘Cost Plus’ contract, assuming they’ll benefit from falling prices when they eventually materialize. However, this choice adds another layer of uncertainty to an already unpredictable scenario.

Choosing ‘Cost Plus’ essentially means taking a gamble. Consider this: building a house is a process that takes over a year, and a lot can change during that time. It translates to shouldering the risk of financial unknowns for an extended period. If prices continue to rise or even remain stable, guess who bears the financial burden? Your dream of significant savings might transform into a financial ordeal.

So, What’s the Alternative? A Fixed Price or Modified Fixed Price Contract.

With a Fixed Price Model, you secure cost certainty right from the start. No surprises, no abrupt budget overruns. You shield yourself from the unpredictable rollercoaster of fluctuating material costs

However, in today’s market, finding a traditional fixed-price builder might be a challenging endeavor. Established builders who have proven their worth now offer a modified fixed-cost contract where the financial risk is shared. It’s a pragmatic solution that allows you to transform your dream home into a reality sooner rather than later.

The Takeaway:

In the realm of new home construction, the future of prices remains uncertain. Prices have consistently shown an upward trajectory, and in a market characterized by uncertainty, securing a firm grip on your budget is a prudent move. The choice ultimately lies with you, but always remember this: in a market that teases with the prospect of lower prices but clings to high ones, playing it safe with a Modified Fixed Price Builder might be your winning card.

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