The custom home building market continues to expand, despite a growing industry focus on entry-level homes. Demand for custom homes—both owner- and contractor-built not-for-sale homes—has been solid in recent years due to home price gains that have boosted homeowner wealth. However, this market is expected to grow more slowly than the rest of the single-family building sector.
Recent Census data show that 171,000 custom homes started construction during the one-year interval spanning the third quarter of 2016 through the end of the second quarter of 2017. This is a 2.4% gain over the prior four-quarter period, which registered 167,000 starts. While growth has been fairly steady off Great Recession lows, the market share of custom homes has declined relative to speculative home building.
Spec home construction was constrained in the aftermath of the recession due to tight AD&C lending conditions, which have eased somewhat over the past three years. Currently, the share of single-family construction made up by custom homes is 21%. This is roughly the same market share recorded from 2000 to 2007.
However, pricing for custom homes has gone up significantly in recent years. The average contract price of a custom home in 2016 was $379,000, according to NAHB analysis of Census data, compared with $260,200 in 2002. Last year, 21% of custom homes had a contract price of $500,000 or more. In 2006, this share was 11%; in 2002, it was 4%. The same upward price trend has occurred at the bottom of the market as well. In 2002, 65% of custom homes had a contract price of less than $200,000. In 2016, that share had fallen to 24%.
Meanwhile, rising costs for labor and building materials continue to negatively affect housing affordability and put upward pressure on home prices. For example, the NAHB/Wells Fargo Housing Opportunity Index shows that over the past five years, the share of new and existing homes for sale that are affordable to a household earning the national median income has fallen from 73.8% to 59.4%.
However, the custom market is better positioned to be shielded from these headwinds, particularly as mortgage interest rates increase. Most buyers of custom homes are already homeowners, and price gains driven by a scarcity of homes on the market have increased their wealth. The most recent household data shows homeowners in aggregate having $13.9 trillion in equity in their homes.
Thus, the custom home outlook remains positive. The market will expand modestly, but at a slower growth rate than the overall single-family market given the need for entry-level homes. The primary concerns for custom builders will continue to be availability of lots and managing material and labor prices.
