... having finished building a custom house, no, it will most likely not be cheaper. Have you checked to see if the neighborhood allows smaller homes? Many neighborhoods like that have a minimum square footage requirement.

Depending on the age of the other homes, you may not be doing yourself a favor(value wise). You may get what you want , by building. But you also usually spend more money, with today's costs.

Most homes in this neighborhood are atleast 20 years old

If they're 20+ years and in the price range you've listed, they are likely builder grade in need of upgrading. Take into account changes you'd want when you look at listings in the neighborhood. The benefit of building is everything is up-to-date at a quality level you will be satisfied with when you move in. And your mortgage already includes all the cost. Plus, by the time you move in rates should be lower. Costs to build will be highly dependant on your planning ability.

$200 a square is very very very cheap. It will be carpet and sheet vinyl with laminate counters and plastic shower surrounds.

Your method of math is NOT correct, reading this is what you did:

- Take the selling/assessment price of someone else's existing house in your neighborhood, divide by the number of square feet, resulting in a price/per SF. Then apply that $/SF multiplied by the square feet you'd like to build arriving at 2500sf/$500K.

Following is the only correct way to price a house to build:

- Design a house and choose everything for your house

- Get a builder to estimate construction cost, then build it

- Once you are complete, for kicks and giggles you can divide the total cost you paid by the square feet and that applies only to your house, by your builder, of your design, in your location, at that particular moment in time. Otherwise it is not a useful or accurate tool. It is just a thumbnail for realtors, interneters, and contractor ballparks to have some quantifiable measure to speak about.

It depends upon where you live. Building a house up to the latest hurricane codes in Florida means the difference between sheltering in place vs. getting the hell out of Dodge. What price peace of mind?

Totally OT, but mandatory evacuation is mandatory for a reason regardless of construction techniques.

It is almost never economically sensible to build a new house - and I have done it several times.

One issue at this moment is that interest rates are high. So you are borrowing money (or not making money) and not even living there yet. You are paying for other housing which is expensive at this moment in time.

And we have a housing shortage so lots of multi-family and tract building is going on which is driving up costs.

So it is almost never the right financial move to build a new house and this moment in time seems particularly bad.

$200 a sqft in the resale market is not considered expensive anymore. It is very local but when you say expensive - realize that there are people in coastal CA on here. Expensive might be $1000 or more.

"Would it make more sense to build a house than to buy a house?"

It makes more sense to build a house than buy a house. It will be more expensive in dollars and cents, but it makes more sense.

If you want to go cheap on the basics look at the 84 Lumber kits. You add the finishes and appliances, etc.

We ended up paying 40% more from our original budget estimate for the construction of our custom home in 2021. So no, it doesn't make economical sense to build a new home instead of buying an existing home.

Luckily the market in our are went crazy hot and people are paying more to buy old existing houses (that need major updates) than what we paid to build a new one, BUT that is not a normal real estate market and not something that we hoped would happen.

People build to get what they want, fresh & new to current design trends, structural & energy standards. Sometimes its somewhat a cultural requirement. New homes usually cost more than a resale. Resales will often need a significant amount of repairs but updates for style are a choice.

Most of our custom build clients remain in the homes up to 2-3 decades.

With the exception of the lumber spikes of 2021 which impacted my builds about 5% overall, a home can and are often built within the original contract budget IF if commenced quickly & completed within a year of materials & trade bids. Many build clients have a reserve budget for items they want, but are not necessary, and make those decisions later. These are not budget overruns.

I want to build a relatively smaller home about 2500 sq ft

First question, if all the other houses are larger, does the neighborhood allow 2500 sf houses to be built? What other requirements does the neighborhood insist upon? Know these details before you purchase the lot.

This would make it a newer house and better resale value

Newer doesn't always mean better resale. I think you're trying to talk yourself into something.

It is almost never economically sensible to build a new house

Yes, it will take more time and money than you expect. Do it because you really want it laid out just as you want -- and only after you've searched and failed to find what you want. We see a lot of house plans here on this site that're really no different than spec houses.