Analysis of the current situation of real estate markets
In the United States:
The housing market has slowed significantly over the past year due to rising prices and interest rates. Home sales fell to about 4.06 million homes annually — the lowest level in nearly 30 years. This comes as mortgage rates have risen to about 7%, along with inflation in home prices. Despite the decline in sales volume, home prices have continued to rise year-over-year by about 2.7%, according to Zillow, with the median U.S. home price now at about $355,000. For example, the median selling price of an existing home was $396,900 in January 2025, according to the National Association of Realtors. This combination of high prices and high interest rates has kept housing affordability at historically low levels, with buyers devoting a record 40%+ of their income to monthly payments. NAR chief economist Lawrence Yun noted that mortgage rates have remained stubbornly high despite the Federal Reserve cutting short-term interest rates several times, keeping housing affordability issues alive amid high prices. In the US commercial sector, office and retail real estate have been negatively impacted by higher financing costs and changing work patterns; the commercial real estate price index has fallen by about 22% from its peak in March 2022 under the weight of higher interest rates, with office vacancy rates in major cities rising due to the adoption of hybrid work.
In the Gulf and Middle East region:
Real estate markets have been active despite some challenges. In Saudi Arabia, residential property prices have risen moderately, driven by strong demand. The residential price index rose by around 3.1% in 2024 compared to the previous year, with variations by type; apartment prices increased by around 3% and villas by around 6.5% year-on-year through Q4 2024, while prices of some traditional housing types fell slightly. This growth is attributed to housing scarcity and high demand from both citizens and residents; Riyadh, for example, saw a 31% increase in residential transactions in Q3 2024 compared to the previous year, and an annual increase of around 5% in average villa prices and 4% for apartments. Vision 2030 projects have also attracted large numbers of expatriates to major cities, adding pressure on housing. In turn, high land and construction costs have increased the cost of real estate development and reduced affordability, posing a challenge, especially for first-time buyers; A Knight Frank report indicated that the proportion of first-time buyers fell from 40% to 29% due to rising prices and borrowing costs. In the UAE, the market performance exceeded expectations in 2024, with record transaction volumes and strong price growth in both Dubai and Abu Dhabi. Dubai recorded record levels of sales and mortgage applications, and residential and commercial property prices rose to record levels. Demand for off-plan properties increased, making up a growing share of sales, prompting some to warn of a potential bubble in this sector. Abu Dhabi also saw significant annual growth in residential prices and rents in 2024. The office sector in Gulf cities maintained its momentum; in Riyadh and Dubai, occupancy rates in prime offices reached high levels, with rents rising significantly due to a shortage of supply. The hospitality and luxury retail sectors benefited from a strong return to tourism activity (for example, the number of international visitors to Saudi Arabia increased by 27% in the first nine months of 2024). On the other hand, some smaller Gulf markets witnessed a quieter performance; In Oman, for example, high interest rates have led to a lull in the market and a 13% drop in apartment prices through 2024, despite a slight increase in villa prices (+2.5%). Overall, the current situation can be described as Gulf markets still witnessing a general increase in prices supported by an economic boom and stimulating government policies, although they face challenges related to the ability of residents to buy with the high cost of financing.
The impact of inflation on purchasing and building decisions
Global inflation over the past two years has led to a significant increase in the cost of home construction, directly impacting the decision to buy a prefabricated home versus build a new one. During and after the COVID-19 pandemic, raw material prices have risen sharply as a result of supply chain disruptions and increased demand. For example, in the United States, the average building materials price index rose 15% in 2022 before growth slowed dramatically to just 1.3% in 2023 as overall inflation eased. Some materials have seen historic price jumps; ready-mix concrete rose 11.2% in 2023 alone after a 10.3% increase in 2022, the second-largest two-year increase since 2000. Although lumber prices fell 31% in 2023 as supplies recovered, they are still about 22% higher than pre-pandemic levels. This inflation in construction inputs has been reflected in the cost of building housing units: Data from the US Housing Finance Agency indicates that building a housing unit in 2023 will cost about 31% more than it did before the pandemic, despite costs remaining relatively stable below the peak recorded in early 2022 by about 10%. In other words, construction costs have outpaced the general inflation rate itself, making building a new home today a much greater financial burden than it was a few years ago.
In the Gulf countries, global inflation and rising material prices have also led to a significant increase in construction costs. Consulting firm Currie & Brown estimates that construction costs in 2023 will rise by about 7% in Saudi Arabia and by about 3% in the UAE, with the increase expected to continue in 2024 by an additional 5-7% in Saudi Arabia and 2-3% in the UAE. This means that anyone looking to build a home in Riyadh or Jeddah, for example, should expect a significantly higher budget than they were a few years ago due to the high cost of materials and labor. At the same time, rising interest rates (as a tool to combat inflation) have contributed to increasing the cost of real estate and bank financing for construction projects. Construction loans have become more expensive, prompting some investors and individuals to postpone or reduce construction projects. High inflation also affects households’ real estate financing decisions; potential buyers face much higher borrowing costs that make monthly installments burdensome, which has led to a decline in demand for mortgages in some markets. For example, in Qatar, many buyers rushed to take out mortgage loans in the first half of 2024 despite high interest rates, but with signs of interest rates falling in the second half of the year, they slowed down their borrowing in anticipation of further reductions. This behavior confirms the sensitivity of the purchase decision to macroeconomic conditions: high inflation and then interest rates make some people wait in the hope of better financing conditions.
When comparing buying a ready-made home versus building a new home under these conditions, we find that each option has its advantages and challenges. Inflated construction costs have made the cost of building a home from scratch significantly higher than buying a similar existing home. According to recent estimates, building a new home can be about $150,000 more expensive than buying a similar prefab home in the United States, where the average cost of building a new home is about $665,000 including land, construction, and fees, while the average price of an existing home is only about $380,000. Of course, a new home may provide future savings on maintenance and renovation costs because it is built to the latest standards, but in the short term, its upfront cost is higher and requires more liquidity or financing. In the Gulf countries, the gap may be less severe due to some support factors (such as the availability of free land or subsidized loans for citizens in Saudi Arabia), but buying a prefab home remains less risky in terms of cost control than building a new home, whose costs can escalate over time. Buying also allows you to benefit immediately from the real estate asset and avoid the long waiting periods and potential construction delays that have recently been exacerbated by supply chain and permitting issues.
On the other hand, inflation affects real estate financing decisions in multiple ways. In a high inflation environment, bank interest rates rise, as we mentioned, making mortgage borrowing expensive and sometimes draining buyers’ creditworthiness (lower loan amounts). Some buyers may prefer the option of fixed, long-term financing in the face of inflation (since the payments are fixed and the value of the debt actually decreases with inflation over the years), but the problem lies in bearing these high payments now. There are also those who see real estate assets as a safe haven from inflation, and they rush to buy as a financial hedge even if the interest rates are high, since the value of the property itself increases with inflation. This trend has helped keep prices high despite the decline in sales in some markets. In short, inflation has created a dilemma: higher construction costs and higher financing costs at the same time, making the decision to own a home (buy or build) more complex and requiring careful calculations of short- and long-term costs.
The role of architects and engineers’ costs in real estate decisions
The cost of engineering and architectural services plays a significant role in the budget of any construction project and, consequently, in the decision to build a new home. When building a home from scratch, it is not just about purchasing materials and paying contractors; a significant portion of the cost goes to designing the plans and supervising the engineering. This cost varies in proportion and proportion by market; for example, in the United States, engineers and architects often charge between 8% and 15% of the construction cost as design and project management fees, and for small or highly complex projects, the percentage may rise to 20%. In contrast, some estimates in Saudi Arabia indicate that the full engineering fees (design and supervision) range from only 3% to 7% of the total project cost, due to the low cost of services locally and the reliance of some offices on lower pricing to attract clients. This difference means that building a home with a custom design will have a much greater financial impact in the United States than in Saudi Arabia, for example. So we notice that many Americans avoid hiring an architect for budget home projects and resort to ready-made plans or limited services to reduce fees, while in the Gulf, the fees of engineers may be relatively less of a barrier (with many local engineering offices available at reasonable costs).
However, the role and quality of design in the success of a real estate project should not be underestimated. Good design can save subsequent costs by avoiding implementation errors and improving the efficiency of use of materials and spaces. But when the budget is squeezed by inflation and the high cost of materials, the owner will look for ways to control engineering expenses without sacrificing the quality of the project. Strategies to reduce design and construction costs while maintaining quality include:
- Choosing ready-made or modular designs: Reusing ready-made architectural plans instead of creating a completely new design can reduce costs and shorten design time. Modular construction has also become a successful strategy for reducing costs and mitigating the impact of material or labor shortages, as it allows parts of the building to be manufactured off-site and then installed, saving time and cost.
- Early collaboration between the design and implementation team: Involving engineers and contractors together from the early stages of the project ensures a realistic design that fits the implementation budget, and reduces costly changes during construction. Reports recommend close coordination between the owner, consultant and contractor to set the schedule and cost and secure resources early.
- Determine the scope of engineering services accurately: Architects can agree on a limited package of services that fits the project budget. For example, the owner may choose to commission the engineer with the basic architectural design only without the costs of full supervision, or to hire an independent engineer to review instead of a large, high-paid office.
- Adopting the principle of value engineering: This is reviewing the design and specifications to search for less expensive alternatives that achieve the same purpose. This includes choosing cheaper but durable alternative materials, or simplifying some unnecessary design elements, while maintaining basic standards of quality and durability.
- Integrating sustainability and efficiency criteria from the start: Energy- and water-efficient design may cost slightly more at the construction stage, but saves on operating and maintenance costs later. Experts point out the importance of considering the long-term lifespan during design to avoid future modification costs. For example, good thermal insulation and natural ventilation design may increase the cost of construction today, but reduce energy and maintenance bills for decades.
- Using digital technologies in design and construction: Adopting building information modeling (BIM) tools and digital analysis allows for the detection of conflicts and errors before construction begins, which avoids costly modifications during work. Technologies such as 3D printing of some elements, and the use of artificial intelligence to improve bills of quantities, also help control costs and enhance efficiency.
- Comparison and competitive pricing: It is preferable to obtain bids from several design offices and compare experiences and costs. Competition may push some to reduce the price or provide additional services at no cost. The same applies to contractors; transparent tenders can save a good percentage of the total cost.
With these strategies, a project owner can reduce the design and construction bill without sacrificing quality and safety. For example, adopting partial prefabrication and standardizing specifications across a project reduces waste, and hiring an engineer with experience in similar projects can save a lot of time and trial and error. Such a balance is essential in today’s inflationary price environment to ensure that building a new home remains economically viable compared to buying a ready-made home.
Tips for making the right decision (buy or build? and how to cope with high interest)
Given the current changes in prices and financing rates, consumers need to take a thoughtful approach to making the right real estate decision. Here are some tips and guidelines to help individuals make the best choice between buying a ready-made property or building it from scratch, and deal with the challenges of the market:
- Evaluating the total cost of buying versus building: Start by calculating all the costs associated with each option. Buying a pre-owned home includes the price of the property, brokerage fees, financing, and perhaps minor maintenance or renovation costs after purchase. Building a home, on the other hand, includes the cost of the land, design, permits, construction (materials and labor), and financing costs during construction. With the recent rise in material and construction costs, you may find that buying an existing home is less expensive than building a new home of the same quality. For example, if the prices of homes listed in your area are reasonable compared to current construction costs (which have increased by about 30% since a few years ago), buying may be the smarter financial decision. However, if you already own the land and have special requirements that the listed homes do not meet, you may be better off building despite the relatively high cost.
- Consider the time factor: Buying gets you a ready-to-move-in home immediately (or within weeks of completing the procedures), while construction can take months to years depending on the size of the project and the implementation conditions. If you need a home urgently or do not want to bear the hassle of renting for a long time during the construction period, buying a ready-made home is a more practical option. Also, in times when interest rates are rising rapidly, a long construction period may expose you to the risk of changing the cost of financing or materials in the middle of the project. So the longer the construction period, the more likely you are to exceed the planned budget. On the other hand, if the prices of properties offered are currently very high, you may choose to build and endure the wait in the hope that you will get a custom home that perfectly meets your needs and is worth the cost of waiting and financing during the construction period.
- Consider local market conditions: The decision can vary depending on the market conditions in your area. In a rising market where real estate prices are rising rapidly, buying land and building a home may be a way to take advantage of the appreciation (the value of the land and the home increases during construction). In a stagnant or declining market, you may find good deals on pre-owned homes for less than the cost of replacing them (that is, less than the cost of building a new home with the same specifications), making buying more economical. Study local indicators such as the annual price growth rate and the number of homes available versus demand. For example, if there are many homes for sale and sales are declining, this may favor buying with the possibility of negotiating a lower price. However, if supply is scarce and prices are rising every year, building may give you better value in the long run.
- Dealing with the Dilemma of High Interest Rates: Currently, interest rates are at their highest levels in decades, burdening buyers with expensive loans. There are several strategies to deal with this situation:
- Find affordable financing options: Don’t accept the first loan offer you come across. Shop around among banks and financial institutions, some of which may offer better deals or special programs for developers and buyers. Sometimes, you can negotiate the same interest rate with the lender, especially if you have a strong credit history. Also, check the possibility of obtaining a government-backed mortgage if you qualify for one. In the Gulf countries, you can find subsidized housing financing programs that reduce the burden.
- Increase the down payment or loan term: The more you pay up front, the lower the loan size and thus the total interest paid. Extending the loan term can also help reduce the monthly payment to a manageable range, although it means paying more total interest in the long run. The choice depends on your current ability and expected cash flow.
- Use the “buy and refinance” option: One of the popular strategies in America today is the saying “marry the house and promise the rate,” meaning buy the house at the right price now and don’t worry too much about the high interest rate because the loan can be refinanced later when the rates are lower. The important thing is that the property is suitable and the price is reasonable. This strategy is risky if rates continue to rise for longer than expected, but historically interest cycles have risen and fallen, giving hope that you can refinance within a few years.
- Seek out seller or developer concessions: In relatively flat markets, some sellers offer incentives and concessions to attract buyers, such as contributing points to lower interest rates in the first few years or covering closing fees. Recent data suggests that about 42% of U.S. sales transactions by the end of 2022 included seller concessions. Don’t hesitate to ask the seller to help ease your interest burden, either directly by reducing the price or indirectly by covering some of your costs. If you’re buying a home from a developer, ask about their financing options; many developers offer financing packages at discounted rates or work with banks to offer lower rates to attract buyers during a high-interest period.
- Negotiating Strategies in Volatile Markets: Whether you’re buying a ready-made home in a slow market or contracting to build a home when material prices are fluctuating, negotiating skills can save you a lot of money. If you’re a buyer in a slow market, take advantage of your negotiating position: Make lower-than-asking offers based on declining sales data, request thorough inspections of everything, and require the seller to fix or cover defects. When buyers are scarce, serious sellers will often accept reasonable price reductions or concessions. If you’re negotiating with a contractor to build a home, try to lock in material prices in the construction contract as much as possible, or buy some essential materials in advance and stock them if you can, to protect yourself from future price fluctuations. Also, compare quotes from multiple contractors and try to engage them in a price competition—but without sacrificing the contractor’s experience and quality. Cheaper prices are not a good option if they come at the expense of quality or time commitment. Finally, consider the circumstances of the seller or contractor: A seller whose home has been on the market for months will be more flexible than a home that is in high demand, and a contractor with few projects currently on the market may offer a better price and be more willing to take on new work. Gathering information about the current state of the local market will help you build an effective negotiation strategy based on the market reality.
Future expectations for the real estate market
Many real estate enthusiasts are looking forward to what will happen in the coming year and the medium term, especially with regard to real estate prices, interest rate trends, and construction sector trends. Although accurate predictions are difficult, expert opinions and recent reports paint a general picture that can be used as a guide for making strategic decisions:
Real Estate Prices: Will They Fall or Stabilize?
Most analysts agree that a major crash in housing prices is unlikely over the next year, with most markets expected to either continue to rise slightly or stabilize at current levels. In the US, after a correction in sales volume in 2023, prices are expected to stabilize and even increase slightly (~2% y/y in 2025 and 2026), according to NAR. This is likely due to the continued undersupply of housing relative to demand in many areas, which protects prices from a sharp decline. Even if inventory levels improve slightly, sales are expected to rebound, keeping the balance close to current levels. Some cities that have seen significant price inflation recently (such as most of the US Southwest) may see modest price declines as they reach high levels of unaffordability, but nationally, no outright annual decline is expected. In the Gulf, the most likely scenario is for positive price momentum to continue, supported by economic and demographic factors. With oil prices remaining relatively stable and government spending on projects continuing, studies indicate that the Gulf real estate sector is set for steady or accelerated growth in the first half of 2024. In Saudi Arabia, for example, despite purchasing power challenges, we saw a general increase in the price index during 2024 by about 0.7% in the third quarter, and with the expected improvement in economic activity in 2025 (GDP growth +4%), prices may continue to rise at a moderate pace. The picture may differ from one category to another; luxury properties and those in prime locations will remain in demand and their value will increase, while medium and economic properties may face pressures if incomes do not catch up with inflation. In general, a significant drop in prices is not expected in the Gulf either, and we may witness stability or slight increases in 2024, especially as governments seek to avoid any recession in this sector due to its developmental role.
Interest Rates: Where Are They Heading?
After a series of sharp rate hikes in 2022-23 to curb inflation, expectations are starting to tilt toward the peak of the monetary tightening cycle. In the US, many experts are now on the same page that the Federal Reserve will begin to gradually reduce rates in 2024 and 2025 if inflation continues to subside, but rates are likely to stabilize at levels higher than they have been over the past decade. NAR chief economist Lawrence Yun expects mortgage rates to stabilize around 6% as the “new normal” (compared to ~4% in the pre-inflation era). That means we may see some decline from current levels near 7%, but not a return to 3% or 4% in the foreseeable future. This news, if realized, would mean a slight improvement in borrowing capacity over time, which could gradually revive pent-up demand. In dollar-pegged economies such as the Gulf (where most countries peg their currencies to the US dollar), domestic interest rate policy closely follows the Fed. Accordingly, if the Fed starts cutting, borrowing costs in the Gulf will also fall, which will support the local real estate sector. Some forecasts indicate that Gulf central banks may cut interest rates slightly in 2024 to support growth, especially if local inflation declines and markets stabilize. However, other scenarios are worth noting: if global inflation rises again or new shocks occur, high interest rates may persist for a longer period, delaying the full recovery of the real estate market. The bottom line: We will likely see interest rates stabilize or gradually decline over the next two years, which will ease some of the burden on buyers and builders, although money is not expected to return to the cheapness it was in the pre-pandemic years.
Future construction and development trends:
In the face of inflation and market changes, the real estate development sector will shape itself in a direction that aims to achieve greater efficiency and lower costs as much as possible. Among these expected trends are:
- Focus on affordable and medium-sized housing: Governments and developers will focus more on building affordable housing that caters to a wider segment of citizens. Recent price increases have pushed many buyers out of the market, so there is a need for projects that offer affordable units (either apartments or smaller houses). For example, we may see an increase in small serviced residential complexes or medium-sized apartments targeting young people and emerging families. In Saudi Arabia, for example, government housing programs will continue to expand to narrow the gap between supply and demand for affordable housing.
- Boost construction with new technologies to save costs and time: As mentioned earlier, off-site industrial construction and technologies such as 3D printing may gain further momentum. The goal is to increase productivity and reduce reliance on intensive labor, which has become more expensive with inflation. Developers may invest in prefabricated factories to supply ready-to-use units to sites. These approaches have proven successful in controlling costs on global projects, and may expand in the Middle East with the need to build quickly on tight budgets.
- Green and sustainable projects: Although they may initially appear more expensive, the trend towards green buildings will continue, driven by government and institutional awareness to reduce energy and water consumption. In the long run, energy-efficient buildings will be less burdensome for residents in terms of operating bills, making them more attractive even in the face of inflation. We expect developers to adopt more sustainability standards to obtain green certifications and attract a segment of buyers who are willing to pay the price difference for future savings.
- Increasing role of institutional investors in housing: In the United States, there is a growing trend towards investing in homes for rent rather than sale, i.e. building complexes of homes and offering them for long-term rental. This trend may continue as many families remain unable to buy and move to rent. Therefore, developers and institutions will invest in rental property ownership as a long-term strategy, which may ease the pressure to buy a little but provide housing alternatives. In the Gulf, we may see a similar model in the luxury sector (such as hotel apartments or villas for rent) but individual home ownership will remain the dominant culture for the majority.
- Megaprojects and new cities: On the other hand, work will continue on the government-backed mega real estate projects, especially in the Gulf (such as Neom City and the Red Sea projects in Saudi Arabia, and urban expansions in Abu Dhabi and Dubai). Despite their high cost, these projects are considered a pillar for diversifying the economy and attracting foreign investment, so money will continue to be pumped into them even if the implementation costs rise slightly. The presence of these large projects may help the construction sector in the region to continue to grow and achieve economies of scale that mitigate the impact of inflation (meaning huge contracts for suppliers and companies that may push them to expand production and reduce unit prices). In addition, the success of these projects will create new waves of demand for housing and services in the surrounding areas.
Conclusion:
The decision to buy or build a home at this stage requires a comprehensive view that takes into account current market conditions and future expectations, along with a careful assessment of personal resources. Inflation and rising interest rates have been a double challenge, but the real estate market has historically adapted to economic cycles. Those who benefited from low interest rates in the past are now facing a slowdown, and the opposite may happen in the coming years as interest rates gradually decline and real estate momentum improves. The golden advice for consumers is to rely on real data (historical selling prices, updated construction costs, available financing offers) and simulate different scenarios before making a decision. Can you afford a higher down payment now for your dream home, or will you wait for the market to stabilize further?