Is Now a Bad Time to Buy Land Part 2

Over the last couple of weeks I have listened to many intelligent people's assessments of where the economy, interest rates, and housing prices go from here.

This includes attending conferences, and personal phone calls with people who are pretty respected in the macroeconomics space.

In short, I still see a total divide in opinions.

One camp thinks that the US will have to lower rates sooner rather than later to keep their GDP growing and preventing their national debt to GDP levels from skyrocketing to unseen ratios, in turn weakening the appetite for their currency and their new bond issuances.

This of course would have a net inflationary effect, especially if Canada were to follow suit to prevent our dollar from getting to strong relative to the USD, which hurt our exports.

Now before I go too far in trying to explain these theories in depth, as I'm no economist, let me briefly outline the other theory, and then give some basic thoughts.

The second camp is of the opinion that, rates are still likely to stay very close to their current levels for some time to come, and are not likely to drop below 4% for the foreseeable future.

This would paint quite a different picture, with an emphasis on the lagging effect of higher interest rate increases, which can take 12-18 months to ripple through asset prices. In other words, this view sees rates staying relatively high, and prices still to come down slightly before going sideways for a long time with little to no increase, somewhat like the 90's.

SO WHAT DOES THIS ALL MEAN?

Honestly, given that these two views are quite different, I think you just have to ask yourself, what situation presents the most risk to you as a land buyer and how to you mitigate it?

Situation 1 (lower interest rate environment) presents the risk that right now is the best time to buy land, because many land sellers have been sitting waiting for 6 months or longer, and their hope in striking a deal may be at an all time low. If rates were to go backward anytime in the next 6 months, seller confidence would immediately be rekindled, and most sellers would likely have a renewed resolved to stick with their current list prices.

Situation 2 presents the risk that if you buy now, prices of homes and land could still drop further, meaning you would have bought slightly higher than the bottom. This risk however is slightly offset by the fact that in this situation (higher interest rate environment), prices of materials and labor will likely be trending slightly downwards, as the economy feels downward pressure generally. Another risk given this situation is that lenders will continue to clam up and be more selective in issuing new loans, and construction lenders will be more risk averse, meaning they could be extra critical of your application and items such as your construction experience, your credit score, your job is self-employed. Lastly, this situation presents the risk that you are building into a devaluing home market...meaning the appraised value of your home is shrinking as you build, which can cause issues with your final appraisal and cash requirements, as well as your equity in your home.

IS ANY OF THIS HELPFUL IN MAKING A LAND BUYING DECISION?!

All of the above disscussion can be summarized by saying, whether or not now is a good time to buy land really depends on what is going to happen with interest rates, which is something that no one knows at this point.

SO with that said, the discussion moves to the final leg of the logic, which is that all discussions about risk are not complete without factoring in time. If your plan is to build a home you can sell for a profit in two years...the way you make your land-buying decision and concern yourself with the interest rate environment should be drastically different than if you plan to build your dream home that will serve your needs for 10-20 years.

If you are building for the long term, a lot of the little ups and downs we talked about in presenting the two rate situations should be greatly minimized. As the long-term target effect of the Bank of Canada's 2% inflation target plays out year over year, the price of all assets should rise nominally, including your land and your house. The greater the time horizon, the greater the chances you are in the green from our current date.

Lastly, all of these discussions and risks from both categories can be avoided by doing one simple thing...

GETTING A GOOD DEAL ON LAND.

Buying your land for 15%-30% + below market value, generally offsets all risks laid out above.

As Warren Buffet says, every investment is a function of the price you buy it at.

NOW - is it easy to get deals on land???

Nope.

Is it possible?

Yes.

With that being said - no one is going to show up knocking on your door telling you that they heard you have been having some conversations about maybe building a home, and tell you that they are dying to get rid of their land right now at a huge steal.

Instead...your probably going to have to be willing to analyze and put in offers on several parcels of property, with some degree of flexibility as to your desired location, as there are only so many options to exhaust in each area.

You also have to start having more conversations with people in your desired area about how you are looking for land.

Some of the best deals I have seen over the last 4 years on both raw land and existing homes have been from off-market conversations.

And back to the title of this article...is now a good time to do any of this? I would say that generally, confidence about the future is quite low right now...so any sellers who have a real motivation to sell, should be willing to entertain any serious offer.

If you are serious about buying land and building someday, do not wait for the perfect piece of land to fall on your lap - it's likely not coming. Instead, you have to take a more active approach, and with some luck, you might get an opportunity that wouldn't have existed otherwise.

I hope this advice is valuable for some of you, and I'm interested to hear whether you think this is generally an accurate assessment on the current state of affairs.

Cheers,

Mitch

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