What Does the Mortgage Rate Increase Mean for Custom Home Building?

Oct 26, 2022 | Custom Home Building, Home Building News

Planning Your Custom Home Build Despite High Mortgage Rates

Years of under-building has resulted in limited options for homebuyers in the real estate market, making custom home building the more desirable option. But rising mortgage rates are making it increasingly difficult for builders and buyers to complete projects in a timely, cost-effective manner. In this blog, we discuss:

With the real estate market dominated by preowned homes, it can be difficult for homebuyers to find a space that satisfies their every need. Building a custom home is a great way to ensure your living space meets all your stylistic and functional needs.

However, rising mortgage rates have caused new-construction growth in 2022 to decline. According to Commerce Department data released in June 2022, the pace of new single-family builds declined to less than 1 million per year, representing a two-year low.

Still, building a custom home offers many unique advantages that existing homes do not. As buyers prepare to construct their dream homes, they’ll need to understand how high mortgage rates might impact their plans so they can do their best to avoid the consequences.

Why are Mortgage Rates So High in 2022?

Mortgage rates are skyrocketing in 2022 mostly due to 40-year high inflation. In an effort to mitigate inflation, the Federal Reserve has implemented rate hikes. While these aren’t directly tied to fixed mortgage rates, Fed rate increases do have a slight impact. This is because mortgage rates will typically fall and rise in anticipation of inflation reports and central bank meeting announcements.

Despite their efforts, the Federal Reserve’s actions could actually drive the economy into a recession. For some GDP analysts, reports for the first half of 2022 indicate we are already in the midst of such an economic crisis. When economic growth is at a standstill, mortgage lenders are forced to make difficult decisions. Offering rates that are too low will result in lost profit. As a result, mortgage rates are at the highest they’ve been since 2007.

When Will Mortgage Rates Go Back Down?

It’s difficult to predict when mortgage rates will go back down. Currently, the average 30-year fixed mortgage rate is 6.7% according to a survey of lenders released September 29, 2022, by Freddie Mac. With the Federal Reserve continuing to implement rate hikes to combat climbing inflation, mortgage rates within this range could be here to stay for the foreseeable future.

How are Rising Mortgage Rates Impacting Custom Home Builds?

Higher mortgage rates aren’t great for any homebuyer, but they can be especially detrimental for those planning a custom home build. This is because mortgage lenders only allow buyers to lock in a rate within a short timeframe — typically one – four months. That means if it takes longer to complete your custom home build, you could end up with a higher mortgage rate than what you originally anticipated.

Because of this, many homebuyers planning custom builds are backing out of their contracts. While not an ideal scenario, it does present unique opportunities for those who are looking to build a custom home. With so many project cancellations, some builders are offering aggressive incentives on standing inventory and projects that are nearly finished. Taking advantage of such incentives is one way that homebuyers can combat the costs associated with rising mortgage rates.

Tips for Custom Home Building Despite High Mortgage Rates

Along with seeking out special offers from project cancellations, there are other considerations that new-home buyers can make to help soften the impact of skyrocketing mortgage rates:

Read Your Contract

Mortgage rates aren’t the only thing on the rise — building materials costs are also steadily increasing. The cost of framing lumber alone increased by 167% from August 2021 to January 2022, according to the NAHB.

In some building contracts, rising supply costs may be passed on to the buyer. For this reason, it’s important that you review your contract carefully to ensure that the prices you pay for building materials are locked in place.

Potential Project Delays

Not only are new home builds more expensive in 2022, but they’re also taking longer to complete. Supply chain delays have made it increasingly challenging for builders to stick to the project timelines they used just a few years ago. With supply chain shortages causing project delays, it’s important for buyers to have a reasonable timeline from their builder.

Work with Specialists

Navigating the processes involved with new-home construction is difficult without the right team. Working with a custom home specialist can help you overcome the most common obstacles associated with financing and planning a new-home build.

At Lee Builders, we have more than 20 years of experience navigating the custom home building process. Having survived several cycles of economic uncertainty, we are uniquely positioned to assist in planning your custom home build despite today’s high mortgage rates. Contact our team to get started with your custom home build today!

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