How Interest Rates Affect the Cost of Building a New Home

In the real estate world, nothing has been more hotly discussed in recent months and years than mortgage interest rates. Will they go up, will they go down or will they hold steady? The truth is no one knows for certain. For those who are wanting to buy an existing home or build a new home, the best plan of action is simply to know your budget and buy when you are financially ready, regardless of what interest rates are doing.

However, for Gateway clients, it’s important to be educated about how interest rates affect the cost of new construction. This blog will explore how interest rates and other important factors impact the housing market and what this means when you are shopping homes for sale near Cheyenne, Wyo.

Factors That Influence the Housing Market

Interest rates are generally top-of-mind but not the only influencer when it comes to housing prices. Multiple factors affect the fluctuation in home costs. By understanding how each impacts the market, you can determine when it’s the right time to move forward with your new home purchase.

Interest Rates

Interest rates receive a lot of attention because they directly affect a homeowner’s monthly mortgage payment. When rates rise, the payment for a home increases; when they’re low, the cost decreases. For example, if you get a home loan for $200,000 with a 30-year term and you make a down payment of 20 percent (or $40,000), you will owe $160,000. If you put down 10 percent, you will have a $180,000 mortgage. The following table illustrates how much you will pay monthly and over the life of the loan in both scenarios.

Mortgage ratePayment after 20% down30-year interest, 20% downPayment, 10% down*30-year interest, 10% down
*Calculations do not include private mortgage insurance (PMI), which may be required on loans with down payments of less than 20%. The actual monthly payment may be higher.

In short, a one percent change in mortgage rate could equal tens of thousands of dollars in savings or additional cost over the life of a 30-year loan. In addition, higher interest rates typically reduce the amount of money you can borrow for a mortgage, while lower interest rates mean you can borrow more.

Supply & Demand

Supply and demand are also critical factors shaping the housing market. When an excess number of homes is available, sellers must reduce their asking price to attract a buyer, creating a “buyer’s market” where supply outpaces demand. In a “seller’s market,” the demand is greater than the supply of homes, allowing sellers to price their home higher and increasing the competition among buyers.

The Economy

The overall health of the economy plays a role in the housing market since people will only buy or build a new home when they can afford to do so. Housing prices often increase during periods of economic growth. A robust economy typically leads to an increase in employment rates, resulting in financial security that often leads to the willingness to invest in a home purchase.

During periods of economic struggle, businesses close and jobs become less secure, making the average person less willing to make significant purchases such as buying a home. Inflation can also lead to higher mortgage rates and increase the cost of building materials, consequently increasing the cost of new homes.

Cost of Construction

As observed during the COVID-19 pandemic, higher material costs can significantly increase home prices. Many building materials — and lumber in particular — skyrocketed in price during this time. The price of lumber rose steadily from $200 for 1,000 board feet to over $1,600, causing the cost of building a new home to rise more than $35,000 on average, according to the National Association of Home Builders.    

The prices of other raw building materials like concrete, windows and doors, siding and roofing are often in flux too, further impacting the final cost of building a new home.

Ready to Build a New Home? Work With Gateway

If you are considering a new construction home, Gateway can help you at every stage of the process, from working with our preferred lender to get the best interest rate to making design selections to the final walkthrough. We offer the opportunity to design and build a custom home or you can choose from our portfolio of customizable floor plans. To get started, call our team at (307) 632-8950 or contact us online to connect with a member of our sales team!

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