With uncertainty engulfing our economy, why would anyone build now? We are confronted daily with customers that are uneasy about moving forward with their building project in the middle of this current economic mess. Of course, each person or family has to evaluate their own financial situation and no one should build if they can’t afford it. But let me make three points before you decide to shelve your building plans:
- Building costs will never be lower
- Mortgage interest rates are at an all time low
- Inflation (or hyperinflation) is on the horizon
See Yourself in 10 Years
Will you be kicking yourself and saying “I knew I should have pulled the trigger when building costs were at an all time low?” In 2020 material and labor costs are much higher and interest rates are on the rise. There are more government regulations and hoops to jump through, which are driving construction costs up even further. Thanks to stimulus spending a decade earlier, the country is experiencing double digit inflation. The smart money locked their 30 year mortgages at interest rates near 5%, and are repaying those loans with inflated dollars.
We all wish for a crystal ball so that we could gaze into the future and make better informed decisions today. Even without a crystal ball, the signs are pretty clear. We are in a tough economic environment; entering the 17th month of the longest recession since the Great Depression. It will probably be a long and protracted recovery before we are back to more normal. Some of the most pessimistic economists are predicting the recovery could last 10 years before real estate values are back to pre-2007 levels.
The Role of Inflation Tomorrow
At some point, we are going to have to pay for the stimulus spending. I’m not going to debate the merits of stimulus spending other than the reality that we cannot continue spending trillions and trillions without paying for it at some point in the future. It either gets paid via higher taxes or, the more politically expedient way, inflation. With all the money the Fed is pumping into the economy, once the recovery starts, inflation is bound to rear its head. Once inflation takes off, you best have your money invested in hard assets that will increase or retain real value. Better yet, leveraging those assets with fixed low interest rate loans that can be repaid with inflated dollars will yield a double inflationary hedge. Whatever you are feeling about real estate and, many people are not feeling very good, real estate is still the best protection against inflation.
New home construction is at its lowest recorded level and there are more builders and subcontractors looking for work ever than ever before. Currently, it is a buyers market with tremendous opportunity to make deals that were unthinkable just a few months ago. Plus you don’t have to wait as long to begin building your project.
If you currently own your building lot and bought it before last year, most likely, your land is not worth as much as pre-2007 levels. But, what does that really mean? If you bought your land to hold long term and build say – a retirement home or family cabin to be held for a number of years and/or passed on to your family, then the land is the land. It still has all of the characteristics, beauty and other reasons that prompted you to buy it in the first place. If your intention is to build on your land, now is the building opportunity of a lifetime.
Chances are pretty good that prices will not go much lower than they are today. It is more likely there will be upward pressure as the economy improves and inflation and interest rates will rise. Bottom line, if you are going to build, it is a far smarter bet to build today than wait. This is a historic time with historic opportunity.