A study released last month revealed surprising details about the cost-benefit of building a home in California.
The study, published by StorageCafe and Yardi, a California-based real estate and property management software company, found that California might actually be one of the best states in the nation to build a dream home versus buying an existing one.
The data showed that it might be cheaper, around $200,000, to build than buy.
The revelation is probably an interesting new piece of information for those who have been struggling to get into the housing market, but for others, the data may have created more questions than it gave answers.
On the surface, it makes some semblance of sense: California is notoriously the most expensive state in the union, and there’s a stark lack of homes on the market. While prices of homes have skyrocketed since the coronavirus pandemic began three years ago, land prices in the nation’s third-largest state might not have increased at the same scale.
But does that necessarily mean that it’s cheaper to build than buy? Well, it depends on where you want to lay down that foundation.
We asked StorageCafe to look deeper into the numbers and break them down on a county-by-county basis. Here’s what they found:
Of 20 counties that the company analyzed (20 because that was the limitation of the available data), building is more affordable than buying in 62% of them.
The data team looked at the price of land per median lot size and inflation-adjusted county-level costs of making a contract with home builders. On top of that, 10% was added to account for administrative costs and fees, including the permitting process and legal fees. Then they compared the total cost of construction against house prices in the area.
In total, 13 of the 20 counties analyzed fell into the "cheaper-to-build" category. Savings are particularly robust in Southern California, data suggests.
The biggest savings, however, come in Santa Clara County where the cost of buying an existing home teeters around $1.6 million or more. Building in that section of Silicon Valley could actually be as much as three times cheaper than building. The price to build in Santa Clara County comes in around $545,000, according to StorageCafe. That's a savings of more than $1 million.
"The construction price includes the price of land ($311K/acre), adjusted by the median lot size and also for inflation," the report states.
Orange County comes in at second on the cost-benefit rankings of the analyzed counties.
With the average cost of an O.C. home being around $1.3 million, building a home comes in at a price tag of about $717,000 — $494,000 less. It's important to note that building a home in Orange County is still more expensive than the average cost of buying a home in California as a whole.
Neighboring Los Angeles County pales in comparison to the discounts offered by the O.C., but it still offers massive savings for those looking to build. While the average home price in Los Angeles County comes in at around $900,000, starting from scratch can cost around $345,000 less — a price tag of about $554,000 when you factor in land prices, labor and other costs. The average lot size of a home in L.A. County is about on par with the national average.
Santa Barbara County, home to celebrity getaways and Southern California wine country, also comes out high on the savings list. Building in Santa Barbara County is about $428,000 cheaper. The cost of land tends to be high, around $211,000 per average lot, but the average lot size is larger than the average lot size across the state.
Further south, homes in San Diego County go for an average asking price of about $895,000. Building can cost about a half-million, but it has some of the most affordable land prices in the state, meaning it might be the best value entirely for those wanting to build and build big.
While the majority of counties analyzed show that there is untapped potential to build, those savings don't apply everywhere.
In particular, counties where home prices are already lower than the California average don't offer those same benefits. Imperial, Kings, Kern and Tulare counties offer more than $100,000 in savings if you buy an existing home rather than build a new one.
Below is the complete breakdown of the 20 counties analyzed to determine the difference between building and buying:
Differences Between Building Instead of Buying a Home in California by County (rounded to nearest decimal)
|County||Diff. Building - Buying a Home||Median Land Price / Acre||Median Lot Size (Acres)||Land Buying Price||Median Construction Contract Price||Total Homebuilding Price||Median House Listings Price|
|Santa Clara County||−$1.1M||$311.6K||0.18||$56K||$439.7K||$545.4K||$1,646.5K|
|San Luis Obispo County||−$479.4K||$99.7K||0.19||$18.9K||$439.7K||$504.5K||$984K|
|Santa Barbara County||−$428.7K||$845.5K||0.25||$211.3K||$439.7K||$716.2K||$1,145K|
|San Diego County||−$389.2K||$71.2K||0.28||$19.9K||$439.7K||$505.7K||$895K|
|Los Angeles County||−$345K||$305K||0.21||$64K||$439.7K||$554.2K||$899.9K|
|Contra Costa County||−$225K||$867.1K||0.15||$130K||$439.7K||$626.8K||$851.9K|
|San Bernardino County||−$26.1K||$30.2K||0.30||$9K||$439.7K||$493.7K||$519.9K|
John Yeressian is a real estate professor at El Camino College in L.A. County.
He says that it's important to remember that, while it's almost always better to build than buy, it has become increasingly difficult to find open space in large metro areas like L.A., San Francisco and San Diego.
"Land in the metro areas is extremely scarce and the challenges to build have become increasingly more difficult with California's 'Green Code,' which requires all buildings to become 'net zero' by 2030," Yeressian told StorageCafe. "This has added construction costs to any land-build projects. Thus, even if you can find land in the metro areas, which is extremely challenging, you will have to overcome the added expenses allocated to new construction."
He adds that the cost of building has actually gone up in recent years as many contractors have moved out of state to assist insurance companies in building homes in Texas and Florida, which have suffered from devastating hurricanes, leaving many homes destroyed and in need of replacement.
Yeressian said that California's metro areas will remain under intense demand pressure unless there's a significant economic recession. He also highlighted a recent survey which found that 1 in 5 Americans would like to call L.A. home, meaning demand likely isn't going anywhere anytime soon.
To see a full list of the 20 counties analyzed as part of the study, and to read more about the methodology used to compile the data, click here.