In my discussions with architects and contractors, I’m hearing that the trend is for owners to put projects on hold right now and wait for better economic news. At the same time I see Warren Buffett’s article in the New York Times today. He states that he’s guided by a simple rule “be fearful when others are greedy, and be greedy when others are fearful”. In addition, at the Housing Colorado NOW! Conference this week the general sentiment was if you can find the money to buy real estate, now is the right time.
Let’s look at how that sentiment might apply to people at the front end of a project who have started or are looking to start working on design with their architect.
The first point is that both prices and interest rates are very low right now. Real estate has taken a price dip, the federal reserve has lowered interest rates and while mortgage rates have climbed a bit they are still near historic lows.
It is important to remember that real estate will appreciate over the long term due to inflationary pressure, energy costs and population growth. Historically, real property much like stock is a better hedge against inflation than cash equivalents.
The risk involved in starting the design of a project may be that the market won’t be ready when the design is complete. However, having the drawings in hand will put you 4, 6 or maybe 8 months ahead when the market does look right. Remember that you can’t start building until you have the drawings. In addition with there being less time pressure you have more time to work to get the design and price dialed in. Taking the correct amount of time to do the design work is much better for a project than a hurry up and wait approach.
Construction and material prices are rising each year, historically it is very unlikely that the cost of materials and labor will actually fall if you wait to build. Checking the Bureau of Labor Statistics shows that the PPI for materials for construction has risen 16.9% year over year for the 3 months ending in September.
Finally, it is important to remember that large projects starting in 2008 will be looking at completion in the 2010 or even the 2011 real estate market. Given the large pullback in construction and another 2-3 years to absorb current inventory there is a high likelihood that the market will look very different at this point.
Obviously each situation is different and owners may be in very different financial positions but its worth taking a hard look at the real reasons for moving forward vs the reasons for not moving forward on a project in this market.