Time to Build: Why this is a great time to build a custom home -- and how to get started

Despite the gloom surrounding the housing landscape at the moment, there are appealing bright sides for savvy investors and homeowners who are considering construction of a new home from house plans.

First of all, the cost of key home construction materials has declined dramatically -- and that rate of decline is slowing. As of the first quarter of 2008, framing lumber is 65% cheaper than it was two years ago and 15% cheaper than a year ago. Drywall producers report a 36% decline in prices since last year, and a 5% decline since last quarter of 2007.

Second of all, labor prices are also down. The last time new housing starts were this low was in 1991, which means custom builders and contractors are hungry for new business. Furthermore, the building laborers and managers working at the moment are seasoned professionals and probably more qualified than the average laborer you could find a few years ago.

Best of all, land prices have fallen in the last two years by more than 20% in some areas of the country.^4 Considering how large a chunk of the new home building cost goes toward purchase of the land, cheap land is probably the best reason to get off the fence and start building.
Understanding First Steps

Recognizing when conditions are right for building a new home will help you go to market. But understanding what to do once you're there will help you feel in control of what is undoubtedly a complicated process. Here's a quick run-through of the major steps in any custom building endeavor.

There are several aspects of building a custom home that differ from purchasing a pre-built one. For instance, no one tells you how much you have to pay for your new home. Instead, you must determine the construction estimate based on conversations with builders in the area and by using online calculation tools. The goal is to make a budget for the project, which necessarily means starting to make decisions about the home itself: size, location, quality of materials and labor, and amenities. This is also when you should close in on a decision about the builder you want to work with. Rely on referrals and qualifications -- as much as their bids -- to narrow the field to no more than three builders.

By choosing a plan from ePlans.com, you have access to the very handy cost-to-build calculator. Based on any of the site's available plans, the calculator researches the material and labor costs for the construction of that home. And unlike generic calculators based on national averages, our tool returns a figure that is zip-code specific to where the home will be built.

Eventually, you'll need the estimate to get pre-approval amount from the lender. Most people choose what's called a construction-to-permanent loan, which is a two-part loan is designed specifically for people who are building a custom home. The first part of the loan is doled out by the lender in periodic draws as the project crosses certain milestones, such as the construction of the foundation, framing, roof, and so forth. When the home is finished, the construction loan converts into a permanent mortgage.

Land Purchase

Real estate is a very regional market, and finding a local broker with experience evaluating and bidding on lots is key to this step. Again, rely on references and established qualifications to find a reputable agent.

To simplify, there are two kinds of land available for purchase: finished lots and raw land. Finished lots are zoned for residential construction and already have utilities access. Raw land has not been tested or zoned for construction - which makes them cheaper. But keep in mind that if the parcel is in a remote area, cost of shipping materials and laborers to the site will be higher.

Remember that financing the land purchase is not covered in the two-part construction loan described above, so you will need a separate lot loan. Or, you can pay cash for the land, in which case you can use the equity to get a better deal on the construction loan.

Material price trends courtesy of the National Association of Home Builders, USG Corp., and estimates based on local land markets.