IT IS THE BEST OF TIMES, IT IS THE WORST OF TIMES

When Charles Dickens wrote “It was the best of times, it was the worst of times…”,  I wonder if he could have known just how fitting that phrase would be in today’s economic crisis.  As dire as our Country’s current economic situation is, it is also obvious that for many, these are times of tremendous opportunity.  Approximately 50% of the homes sales now across the Country are first-time homebuyers; taking advantage of unbelievably low prices and the $8,000 tax credit.  Home affordability has hit an all time high just as interest rates hit multi-decade lows. 

So, why is it that so many people who could buy or build are, instead, choosing to wait on the sidelines?  Obviously, fear is a major factor.  After last fall’s near collapse of the financial industry, and months of gloom and doom, it’s just difficult to take the plunge and make a large-ticket purchase of any kind, even if you know down deep, it is the right time.  Another factor is the lack of understand of the housing market, and all the myriad of indices that are used to calculate home values.  For example, most people do not understand that many of the “home value” numbers come from average sales price calculations.  In other words, add up the cumulative dollar amount of all the homes sold in a particular area, divided by the total number of homes sold, and there you have the average sales price.  You can read articles every day stating that average home sales prices have fallen 20% or 40%, etc.  It is assumed, possibly even implied by some articles, that this average sales calculation has something to do with the value of a particular home.  It actually tells you nothing of the sort.  The average sales price is simply a reflection of the type of homes being sold at a particular time.  First-time homebuyers traditionally buy less expensive homes.  So, it only makes sense that if 50% of the homes being sold these days are being purchased by first-time homebuyers, then of course the average sales price will be significantly lower that it was two years ago when the McMansions were being sold left and right.  Many people have a misunderstanding of such indices, and make assumptions about the housing market and home values that are simply not correct.

One such assumption is that lower home values equate to lower building costs.  This is absolutely not correct.  The housing market bubble occurred not because housing costs were tremendously out of balance, but because investors had artificially driven up home values.  In other words, rather than builders making 20%-30% above costs to build a home, some builders and investors, especially those in California, Florida and Arizona, had gotten accustomed to making 50%-60% or more.  What does all that mean?  It means that the 40% drop in home prices that have been seen in some areas have been from the unwinding of ballooned margins rather than a reduction in costs.  In other words, it costs the same today to build a home as it did two years ago, but builders and investors have had to realize that reasonable margins have to be maintained. 

So, how does this affect you if you are thinking of building a new home?  The reason that today’s environment is so attractive to anyone who might be thinking of building a new home is not because of a decrease in direct costs, because there have been very few, if any.  The attractiveness comes from the fact that mortgage rates are at lows not seen in decades, and unlikely to stay around very long.  It is also a fact that an unpleasant result of all that the Government has done to turn the economy around will eventually be inflation.  Costs are destined to increase, probably within the next 12-18 months. 

There is a definite difference between those who are trying to time the housing market to purchase a foreclosure property or short-sale, and those who want to build a Custom home.   If you are wanting to build your new home because you don’t want to settle for someone else’s dream home, then you should take a good long look at your current financial situation to see if it makes sense to move forward on plans to build now.  If your finances don’t allow for it at this time, then by all means, don’t take risks that you may eventually regret.  But, if your finances do allow you to move ahead with building a new home, don’t make the mistake of thinking that costs will decrease further in unison with home values.  There simply is no correlation between the two; no matter what some may try to lead you to believe.    The bottom line is that the very worst of times, may well be your very best of times.  Don’t miss the opportunity!