Soaring gas prices mean an increase in interest rates and construction
year ago the politicians and the oil companies (some argue that they
are one in the same) blamed an unprecedented spike in fuel prices on
temporary aberrations. A protracted war in an oil-rich region of the
world and a hurricane season that created the worst natural disaster
in American history and temporarily crippled domestic oil production
were to blame.
Now the same pundits inform us that high fuel prices are the way of the
future. And they attempt to comfort us by adding that environmentally-friendly
policy changes are being enacted to alleviate our dependence on oil. But
for many of us, the only green machinery on the horizon seems to be the
one that devours our greenbacks every time we pull up to the self-service
pump. The trickle-down effect is already being felt throughout the economy,
as the world’s supply of oil reportedly dwindles to a trickle.
So if you and your partner are thinking of buying, building, or refinancing
a house, you may want to fuel your decision-making with some facts related
to the effect of fuel supplies on the housing market.
First the bad news:
• Gas prices will raise construction costs.
Almost everything related to building projects runs on gasoline. When prices
for fuel go up, it costs more to produce building materials and more to
ship them. If the price of artichokes doubled this month due to shipping
costs, imagine what that means for those who are shipping concrete blocks
across the country.
Next time you pass one of these gigantic dual-wheel extended cab pickup
trucks with the tool box mounted on the back, consider how many construction
workers drive back and forth to building sites in those hardworking gas
guzzlers. For such commuters to make ends meet something has got to give;
and if you are building a new home, you’ll probably be the one doing
most of the giving.
• Interest rates are headed up, not down.
Interest rates are rising, and although there is some mild conversation
about them not being hiked every time the Federal Reserve gets together
for coffee and donuts, nobody is projecting that interest rates are going
to do a U-turn and actually fall. Don’t bank on getting easier money
this time next year, and if you have an adjustable rate mortgage, you might
want to think about converting it to a fixed rate.
• As rates rise it gets harder to qualify for a loan.
When interest rates and construction costs go up, new loans will not only
cost more, but will be more difficult to qualify for with the same amount
of monthly income. The challenge of finding a mortgage may rain on the
parade of homes and put a damper on home buying plans over the next few
months and years.
Now for the good news:
• Interest rates are still a bargain.
If you have been thinking of buying or building, there is no time like
the present. Interest rates are near their all-time lows and many investors
still consider today’s rates to be almost like free money. Compared
to historical numbers, today’s rates represent deep bargain basement
• Mortgage companies need the business.
Rather than looking backward at last year’s rates and lamenting that
you didn’t lock them then, think to the future. If you have an adjustable
rate mortgage, this may be your best chance to refinance to a fixed rate
loan. If you’ve been sitting on the fence waiting for rates to move
before you buy a home, this is the time to get off the bench and into the
game. Lenders worry about the future just like their customers do, and
right now mortgage companies are more than willing to cooperate with those
who want to refinance existing mortgages or originate new ones, because
business for banks is slowing.
• Construction costs are still reasonable.
And if you have construction plans, you will be much better off breaking
ground now, while the potential spike in cost per square foot is still
a topic of armchair speculation. By the time gasoline hits four dollars
a gallon, it will be too late to reconsider your options. Even during an
average hurricane season, it is not unusual to see the price of items like
plywood and sheet rock skyrocket. Now is the time to lock in not only low
interest rates, but also lower building costs.