Phoenix Home Listers
Recently I had an opportunity to correspond with a client regarding considerations in deciding to purchase a new "spec" home or building from the ground up. I feel that my response to him might be helpful to others pondering the same question. Here it is:
Thanks for your reply, Mike. I’m sorry you got to the builder's office too late to see the homes on Monday. Usually the sales offices close down around 4:30 or 5:00. Let me know if you’d like for me to go with you this weekend. I’ll be glad to do so.
A couple of thoughts for you to consider in the meantime:
Regarding the price of building a home and the likelihood that a builder will accept a lower offer than the base price, normally the builders are willing to consider lower offers on new construction “spec” homes because they are inventory on hand that they really want to get off their hands. Remember that these companies are actually in the money business, not the real estate business. Houses on hand represent money they have extended and want to get back into their account. An unbuilt home represents a relatively low investment on the company’s part, since it is only a vacant piece of land that they can sit on until prices start going up again (probably within 6 to 8 months). Too, a client that has a contract for new construction represents a longer term risk to the builder, since the client could either cancel the contract during the construction period, or might not qualify for financing for a variety of reasons at the time of closing. This “unknown” element diminishes the builder’s willingness to negotiate a lower price on new construction contracts, as opposed to spec homes.
Another thing you may want to seriously consider in your decision about a new spec home vs building is the lending environment. The Fed has dropped the prime interest rate and discount rate several times (2 points) over the last 60 days. As a result interest rates right now are at historic lows again. They’ve done this to stimulate the sectors of the economy that are based on lending and credit. As soon as that starts to pick up again, you can count on the Fed raising rates quickly because, while the temporary lower rates are good for borrowers, they are devastating for investors (and especially retirees) who have their funds in conservative interest-dependent portfolios like CD’s, mortgage securities and bonds. So the Fed is doing a balancing act with lowering and raising interest rates, and they’ll want to raise them again just the minute it looks like they have had their intended effect on the credit markets. This could mean 8 months from now, or it could happen in 30 days. No one knows but the Fed chairman and the Board.
The reason I’m mentioning this is that when you do a contract for new construction, your financing is not established concurrently. A loan interest rate is normally locked within 30 to 45 days of closing. This means that the interest rate you’ll have will be the going rate 6 or 8 months down the road when the home is finished and you’re ready to close on the loan. As the economy rebounds you can count on rates picking up again. As well, during the interim period, you could experience an unavoidable late payment on one of your lines of credit (or any one of a hundred other unanticipated events: identity theft; creditor account mistakes; change in employment; additional medical bills; lawsuit) that would bump you into a higher interest rate category or lower the loan amount you qualify for. Also, lenders could continue to tighten up their underwriting guidelines or abandon certain loan programs, making it even more difficult to qualify for, or otherwise obtain, a loan.
Please forgive me if this sounds so dreadfully negative. I just feel that it is my responsibility as your agent to raise these issues to you as warnings and matters to consider in your decision-making.
I hope this helps you somewhat in your decision-making.
