Blog

February 3, 2010

I often get asked by people if now is a good time to build even though the economy and housing are down. It might seem counterintuitive at first but the answer is a resounding yes.  Some of the advantages that are a result of our current economics are: low-interest rates, prices of building materials and labor, and a reduction in the total length of the project.Interest Rates-  They are at historic lows.  The Fed is holding the interest rates low to help battle against the recession.  With America’s large national debt and the amount of money we, as a nation, keep spending; we are ripe for inflation.  Many predict that as the market recovers a rise in interest rates will follow.  What does that mean for you as a consumer?

• A move in interest rates from 5% to 6% adds 11.67% to your monthly mortgage payment on a 30 year loan or $188 a month on a $300,000 loan.
• A move in interest rates from 6% to 7% add 10.95% to your monthly mortgage payment on a 30 year loan or $197 a month on a $300,000 loan.
• A move in interest rates from 7% to 8% add 10.32% to your monthly mortgage payment on a 30 year loan or $206 a month on a $300,000 loan.

As you can see if the rates were to move from 5% to 8% the opportunity cost would be 36.70% or $591 a month for a $300,000 30 year loan. In other terms at 8% interest your monthly mortgage payment on at 30 year loan for $300,000 would be approximately the same as a $410,000 loan at 5%. Now with the interest rates low the same monthly mortgage payment on a 30 year loan for $300,000 at 5% would only be able to get you $219,500 if interest rates rose to 8%. This example shows how large of a part interest rates play into the amount of house you can get for your money.Now banks have become much more reluctant to loan money (which by the results of what we have seen in the last couple of years is not such a bad thing). What that means is you will have to come up with more money down and they will tend to appraise the projects much tighter.Price of Building Materials and Labor- Building materials in the volatile industries have gone down as the price of oil, steel and lumber have also fallen. Other materials have stayed level but have stopped rising like they once were.  I have also noticed with the downsizing of retail stores there deals out there.  Your contractor will have to pay more attention to your schedule than ever before though because retail outlets and suppliers are carrying less in inventory and manufacturers are taking longer in between production runs.  If you are not careful your job can be delayed while longer than typical lead times keep you from moving forward.Labor has defiantly become more competitive and will continue to be as the market corrects itself by either more companies and employees getting out of the trades or demand rises.  The end result will be a stronger building industry as the market weeds out the weaker companies.Reduction in the Total Length of the Project- Recently I have experienced a shortened building timeline.  The design process has been quickened with architects and engineers having lighter work loads, the permit process has shorted with such lower volume, and contractors are quicker to jobs.  As stated above, you will need to pay attention to your materials to aviod delays. For further questions about building on California’s Central Coast you can email me at thomas@occbuild.com.