New Homes Pricing

I have been in the homebuilding industry since 1978. I began as a laborer on a framing crew until I could run the framing crew. I later got my real estate license and subsequently became our broker and sales manager. I moved into land acquisition and zoning in the early 90’s and mostly camped out there, but, in a family business, everyone wears all hats. At Knight Homes and now Chisel Mill Homes, we fought and fight, to hold down costs. All I’ve seen the last 46 years is professionals working very hard to offer the most home for as affordable a price as possible. I think I speak for most in the industry that we are shocked at costs and home prices the last several years. I want to discuss three factors which impact housing prices and what Chisel Mill is doing to mitigate these factors.  

First, government regulations have changed and have dramatically impacted home prices. Our local governments mandate house sizes and lot sizes. They mandate roof pitches and parking spaces and the number of entrances a community must have. Some municipalities mandate that communities must be age targeted in order to access sewer. Between building permits, impact fees, water and sewer fees, storm water management fees, and the time lost, I believe approximately 30% of a home’s costs can be laid at the feet of local government. For an example, Henry County just raised it’s impact fees to $7,000.00 per house. That will not cost the builder anything. But we’ll do some math in a moment to illustrate how that $7,000.00 increased cost will cause a $10,000.00 increase in home price.    

Second, material and mechanical increases. This one has a chance to flatten and even come down. Did you ever get tired of hearing “we’re having supply chain issues”, or, ”that’s not available because, you know, the supply chain”. Well, the crushing blow manufacturing took during the COVID shut downs did cause supply issues. Some manufacturers are just now getting up to speed and inventories are just now getting back to normal levels. In the mid 1980’s we could build a home, start to move in, in 45 days. In 2021 we were having to order widows 8 months in advance. We were hoping to get cabinets in 4 months. It was mind numbing, and, costly. You understand supply and demand. In 2021 all builders were competing for a scarce amount of windows, cabinets, even concrete. Consequently prices of those products soared and it was all reflected in sales prices. It was okay for a while because interest rates were so low, buyers were willing to grin and bear it in order to get a home in a market which didn’t have much inventory.  Now, with higher rates we have seen sales flatten. Meanwhile material inventories have continued to build which we hope will put downward pressure on costs. Stay tuned.

Third, lot costs have at least tripled the last 4 years. This can mostly be laid at the feet of local municipalities. The land prices have pretty much stayed the same but the government mandates on detention, and curb, and lot widths and erosion and entrances and turning lanes, and, and, and, are overwhelming, and expensive. Additionally, the time involved is hard to believe and also expensive. Because of municipalities and their zoning and permitting processes, what once took 6 months is now routinely taking over a year. The cost of parking that much money for a year is expensive and is passed through to the homebuyer. To put in perspective; if I contract with a landowner for his property in January of 2025, it will likely take until September 2025 before it’s zoned. We won’t be able to submit engineered drawings for permit approval until December 2025. We will get our first set of review comments in February 2026. Lately we are averaging 5 reviews which the municipality retains 30 days to address. So, now we might have a permit in July 2026. The landowner finally gets paid after the permit, August 2026, 20 months after contract. Truly inexcusable, and truly expensive.  

So, in light of all that, how do we price new houses?

(Building lot + Costs)/.70 = Sales Price

Let’s look at an 1800 square foot home in Metropolitan Atlanta. Let’s say  costs are $90 per foot and our lot is $120,000.00. Dividing by .70 yields a price with a gross margin of 30%.

($120,000.00 + $162,000.00)/.70 = sales price

($282,000.00) / .70 = sales price

$403,000.00 = sales price

So, you may be thinking, “a 30% gross margin? Should the builder make $121,000.00 for building a house?”. No, he shouldn’t. And, he doesn’t.

(Gross margin – cost of sale – overhead) = net profit

(30% - 6% - 11%) = net profit

$121,000.00 - $24,180.00 - $44,330.00 = net profit

$52,490.00 = Net Profit, 13%

From the net profit the builder Pays taxes and is left with about $35,000.00 to secure more land and attempt to grow the business.

Chisel Mill is combating these costs and winning the home price battle. Chisel Mill is very selective with the land it buys and home plans it builds. I’ve watched all the professionals at Chisel Mill search high and low for superior home sites at prices more akin to what builders were paying ten years ago, Chisel Mill stays within driving distances of major employment centers. Homesites and neighborhoods which feel very rural are typically no more than a 20 minute drive from significant employment, dining and entertainment. While Chisel Mill is subject to many of the same costs other builders face, the homes Chisel Mill builds are very attractive, very livable, and very efficient to build. Additionally, Chisel Mill Homes are usually in areas which qualify for 100% financing.  

In closing, you see how we in the industry price homes. Not everyone is the same but we’re all pretty close. We will continue to pressure all government agencies and all or trade partners to drive prices down. In the interim, there is a value leader and in South Metro Atlanta it’s Chisel Mill Homes.