A TIME TO BUILD
If you’ve been planning to build a new home, you’ve surely had many decisions to make - and recently, a long list of reservations. One of your biggest decisions has probably been when to build considering the current economic situation. And that, no doubt, has been a difficult decision to make. You’ve probably been seeking answers to questions like, “Should I build now or should I wait six months or a year?” Or perhaps you’ve been thinking, “If I wait a while longer, the economy may worsen and I can get an even better deal as material and labor costs come down further”. Well, there is always that possibility, but who has a crystal ball that can accurately tell you when the housing market and the economy will hit bottom?
I certainly don’t possess that crystal ball, but there are a lot of factors in the market place right now that indicate this is a great time to move forward with your building project. Non-petroleum based building materials have come down drastically in recent years and many are at twenty year lows. Because of current conditions in the housing market, labor costs are on the decline in many cases. And to sweeten the pot even more, mortgage rates are at an all time low around the country. All these factors add up to a highly favorable time to build a new home, to do that addition you need for your growing family or to finally tackle that major renovation that’s been needed for years.
To give you a more precise depiction of how far wooden building materials have fallen in recent years, here are a couple of examples from information provided by Random Lengths, an industry leader in tracking and reporting wood product prices for the building industry. Based on a composite price for structural panel materials such as plywood and OSB, the average price in 2004 was $462.00 per thousand square feet (MSF). In 2008 the same materials averaged selling for $295.00/MSF. That’s a price reduction of 63.8%. In addition, the composite price for framing lumber in 2004 was $404/MSF and in 2008 the average composite price was $255/MSF, a 63% reduction.
For an even more detailed comparison, the price of a 2x6x105” stud from a local building supply company is currently selling for $4.10 and the price in June of 2006 was $5.32. That’s a 23% reduction in a span of eighteen months. A sheet of 7/16” OSB sheathing currently sells for $5.55 and in June of 2006 that same material sold for $9.24/sheet, a whopping 40% decrease in eighteen months. With these kinds of price reductions, you can begin to understand how the cost of a new home in 2009 can be reduced.
So, now you may be thinking “if I wait another year to build, the prices should be even lower”. Perhaps. Perhaps not, if you understand what’s going on in the market place. As mentioned above, the price of many wood products is at a twenty year low and the mills that produce these products have had to drastically cut back on their production. If the current economic situation continues for months to come, some of these mills will not make it through the recession. When the recovery does start to take place, the supply will not be available to keep up with the increasing demand and we could possibly see some sharp increases in the price of building materials. So beware, the current low prices cannot and will not last.
There are other building material price conditions that should be taken into consideration as well. Not all building material prices have come down. Concrete actually had a price increase as of January 1, 2009 and reports range from 3% to 10%. How can that happen, you ask? Well, I haven’t gotten a solid answer to that question either, but there seems to be just enough demand and cost increases in the production of cement that the concrete companies are able to make the price increase “stick” for now. Petroleum based products like asphalt shingles have been very firm in their pricing and have even gone up in recent months. Steel products like metal roofing and nails have retained firm pricing, although there has been a little softening in the past few months. Will these product prices come down in the future? There are always factors that come into play that none of us anticipate, but unless this recession drags on for an extended period of time, it is doubtful there will be any drastic movement.
The price of high quality Douglas fir from the west coast and British Columbia has not come down either. These large timbers are primarily used in timber frame structures around the country, and so far, these products have been able to maintain their prices. The supply of large, premium trees that yield these quality timbers has not increased nor has the demand fallen enough that prices in this category have started to move downward. The point is, if these materials can hold on to their current pricing through the recession, it’s almost a sure bet that the prices will increase as the economy cranks up again.
Building industry sources indicate that overall material costs for residential construction have come down at least 20% in the past fourteen months. If you consider that the cost of a home breaks down to approximately 55% materials and 45% labor, apply the 20% reduction to your material costs, then you can begin to realize the cost saving potential in the current economic climate.
Another positive reason to build a new home in the coming months is the reduction in labor cost that can be realized. Several contractors have reported in recent weeks that they have reduced their fees to be able to get the contract on a job. Supply and demand is definitely at work in the labor market. Most home construction contracts are done on a “cost plus basis” and the percentage that contractors have been willing to charge has been coming down in recent months - from 18% to 15% and even to 13%. A five percent reduction in labor costs can be a substantial reduction in the cost of your new home. Sub-contractors are willing to reduce their fees in reported cases too. One recent story revealed that a drywall contractor was willing to reduce his price by 33% to get the job. These kinds of labor savings really start to add up when coupled with the reduced cost of materials. Your contractor of choice will likely negotiate a reasonable rate that will allow the wheels of construction to keep turning. If you'll be fair and reasonable there are savings to be realized.
One more "big ticket" reason to build sooner rather than later is the current low mortgage rates. Thirty-year rates are hovering around 5.5% and fifteen-year mortgages are in the vicinity of 4.75%. We've all heard recent news stories about banks that are not loaning money, but there ARE financial institutions in most communities that are on a solid financial footing and DO have money to loan for homes. Recent discussions with several local financial institutions have proven this to be true. A little research in your area for a mortgage could help make your entire home construction project a very sweet deal.
If you are still on the fence and can't decide if this is the right time to start a home construction project, consider the following: the current situation in the housing industry has virtually eliminated the backlog of work that existed a year or so ago. There are very good quality contractors, sub-contractors and craftsmen available now that may not have been accessible for your project only a few months ago. In this business climate, your contractor can work with more favored craftsmen or sub-contractors without sacrificing an efficient time line.
All things considered, this is an ideal time to start a home construction project. As President Barack Obama has articulated, "Change will not come if we wait for some other person or some other time. We are the ones we've been waiting for. We are the change that we seek." With fallen material prices, reduced labor cost and record low mortgage rates, it's an ideal time to step forward and be part of our economic solution. This decision doesn't require a crystal ball.
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By Drew Sumrell, President
Woodborne Design Inc.
Source: Woodborne Design Quarterly
Publication date: January 2009