Despite the Rhetoric, Housing is Improving

What a difference a year makes. Just 12 months ago, the Country as a whole was beginning to realize just how severe our economic situation was, and just how horrible things could get. Fear was rampant, and for anyone who thought we had seen the worst of the housing crisis, a nasty surprise was in the making.

As the first few months of the Obama administration began to unfold, negotiations for an historic stimulus package were underway. When the final version of the stimulus package was revealed, those of us whose livelihoods depend on housing were tremendously disappointed to see that the $15,000 home buyer tax credit had been negotiated down to an $8,000 tax credit; only for first time home buyers. What we now know is that the economy was in far worse shape than anyone thought, and the lackluster effort to stimulate housing was simply not enough to jump start housing in those early months of 2009. In the last half of 2009, as it became obvious that the economy and housing prices were beginning to stabilize, first time homebuyers began to take advantage of the housing credit, and housing numbers, in general, began to look much, much better. What we may never know is just how much better 2009 would have been for housing, and the economy in general, had the original $15,000 tax credit for all homebuyers been passed. History will judge whether the $8,000 first time homebuyer tax credit was genius, or far less effective than it could have been. For those who are part of the currently 10.2% of Americans who are unemployed, most would argue that the stimulus package, in general, should have been far more aggressive, and should have included the $15,000 tax credit from the beginning.

Now, we must look forward. We will never know what “might have been”, but what we have to concentrate on is what we now know, and what we believe is about to happen in 2010. For the record, here are my thoughts:

In Buncombe County, NC, in December of 2008, there were well over 400 homes on the market that were classified as single family residential NEW homes; meaning that no one had ever lived in the home. As of the date of this post, there are only 273. What is even more encouraging is that very few new homes are being added to the market. The problem with the market is simply an oversupply of homes; new and existing. The only way to cure that problem is to increase sales, decrease inventory, or both. Sales have not increased, and with the current unemployment rate, it is unlikely to increase dramatically any time soon. But, the fact that the number of new homes on the market has decreased so significantly in the past year, even in this horrible economic environment, is very encouraging. Those who say that the drop in housing starts in October is somehow a bad thing for the housing market, are obviously not understanding the problem. The fact that housing starts are staying low while sales are picking up, though anemic in their increase, is a fabulous sign for the future of the housing market. As the economy begins to gradually improve in 2010, more people will begin to enter the market as potential buyers.
Despite the rhetoric that is constantly spewed by investors who would like to “talk” the market down for a few more months so they can get a few more good deals, Americans are beginning to realize that their window of opportunity is going to begin to close. Over the next 12 to 18 months, the perfect storm of the lowest interest rates in history, housing affordability at an all time high, government incentives to purchase, and the obvious move toward stability in prices, will slowly begin to fade away. If you are not financially able to take advantage of this historic time in the housing market, then by all means, sit this one out for now. The last thing we need are homebuyers continuing to struggle to pay for their homes. However, if you are financially capable of taking advantage of the very best time in recent history to build or buy a home, then DO NOT sit on the sidelines. A rising tide lifts all boats. Now is not the time to stay on shore!

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Home Building 101

There are numerous misperceptions when it comes to home building. Here are just a few of the answers to some common misunderstandings:

Question: When is a Building Permit required?

Answer: Basically any residential structure built in NC requires a building permit. The local code official (Usually County) is responsible for overseeing permitting and inspections. It is a misperception that if you do not require being hooked to an electric grid (in other words, electricity being provided by an electric company), then building inspections are not required. This misinformation stems from the fact that code officials have the authority to deny electricity hookup to the home unless all code requirements are met. Though this is true, this does not mean that inspections are not required on homes that do not require electricity hookup from an electricity company. Furthermore, code officials have legal authority to impose fines and other punishment up to requiring that the home be uninhabited until the home can be inspected and brought up to code. The bottom line is that all homes built in NC require a building permit and inspections. Trying to get around this fact could cost the homeowner drastically. So, follow the rules and obtain the necessary permits and inspections when building a home.

Question: When is it necessary for a Licensed General Contractor to build my home?

Answer: In NC, state law allows for a homeowner to act as their own contractor in building their home provided that: The home is their primary residence, and they will live in the home for at least the next 12 months after the home is completed. Some Counties in NC actually require that an affidavit be signed to this affect. Obviously, any commercial structure would not fall under these requirements. Also, any home that is being built specifically as an income producing property (rental) does not fall under these requirements. Keep in mind also that some Counties require that a test be passed in order for an unlicensed homeowner to provide electrical, mechanical or plumbing work on the home. For clarity, ask your local code official.

Question: How do I go about finding a “good” Licensed General Contractor?

Answer: To answer this question, it is necessary to understand how General Contractor licensing in NC is managed. To become a licensed General Contractor in NC, a person must first apply and be approved to “sit for” the Contractor’s exam. A contractor can apply to take the residential or building exam. A contractor with residential license may build any residential structure including single family homes and duplexes. A contractor with building license can build any structure, residential or commercial. Once an applicant passes the desired exam, the applicant is eligible to apply for a license. The level of license granted depends on the financial strength of the applicant. In NC, Licenses are issued as Limited, Intermediate or Unlimited. As of the date of this post, a licensee holding a limited license may build a single structure with a construction cost of up to $500,000. An intermediate license is good up to $1,000,000, and unlimited is…just as it implies, good for any structure of any value. Armed with this information, ask potential contractors for a copy of their license. On the license will be the type of license (residential or building) and the level. There will also be a license number. Armed with the license number, you can go to www.nclbgc.org to inquire regarding a particular licensee. After you verify the existence of a valid contractor’s license, one of the best ways to evaluate a contractor is to ask for a list of 10 or more references. It is true that almost any company can come up with 3 or 4 references that will speak well of them, finding 10 is a bit more difficult. In many cases, the contractor can arrange for you to visit some of the homes they have built. Lastly, evaluate whether the contractor has the support to supply your needs, i.e., a design center, well established subcontractors, etc. Use good common sense to evaluate the contractor, and you should be fine.

Question: How many pricing estimates should I get from Contractors to ensure that I get a quality home at a reasonable price?

Answer: There’s certainly no magic answer to this question. Some people feel that three bids are adequate, while some do their homework early and find a builder they are comfortable with, and only have that builder quote the project. I believe the answer is to feel comfortable with pricing and quality. One misperception is that larger builders can somehow build for much less than smaller builders. The truth is that there is very little difference in the pricing structure between large builder and smaller builders. Most of the pricing difference comes from negotiated pricing with national suppliers for specific windows, doors, siding, cabinetry, etc. Special pricing provisions may well lower overall costs by 3%-5%. But, larger builders’ overhead more than offsets any savings from national contracts. Further, such national contracts serve to limit the choices of the homeowner rather than providing true custom choices. The bottom line is that builders who have been in business for a while have done so because they have been able to keep costs under control while providing the best quality available.

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An Honest Discussion-The Housing Market

For over three years now, the US housing market has been in a free fall. Whether this is a horrible event, or needed relief, depends on which side of the proverbial fence you are standing. By now, most informed Americans know that during the housing boom years, hot markets like Florida, California and Arizona, saw unsustainable increases in home values. It was this insatiable appetite for real estate, and dreams of a quick fortune that drove investors into the market, and drove financial institutions to come up with “creative” ways to ensure that anyone who wanted to buy a home could have access to funding. Now, as the discussion turns to the stabilization of the housing market, what seems to be lost is an honest discussion as to where we go from here.

What is most frustrating to me personally is the seemingly uninformed opinion that home prices will stay where they are now. The bust in the housing market, though needed in some areas of the Country, could have been handled in a much better way. But, as I heard it said recently, “…we shouldn’t be as stupid on the way down as we were on the way up.” In other words, unbridled growth, which led to the housing boom, was not helpful for the long-term health of the housing market. But, the total disintegration of the housing industry is equally not helpful. With all the speculation about what will happen with the housing market going forward, there are some facts that we know.

• First, we know for a fact that the US population is predictably increasing, and as a result, this Country’s ability to provide adequate housing will be critical.

• Second, as the population grows, and more homes are built, there will be increasing competition for the fewer and fewer pieces of property available. It is bewildering that though Americans are very concerned that fewer oil reserves to meet our needs will ultimately result in higher oil prices, no one is discussing the fact that we have a limited amount of room on the planet to house people. The major difference between the two is that though there may eventually be alternative fuel sources to lessen our dependence on oil, nothing short of a plan to start communities in space will lessen our dependence on real estate to house our people.

• Third is cost. Let’s cut through the hype and get to the facts. The facts are that direct building costs are higher today than they were in 2007 when the housing bust began, mainly due to increases in petroleum-based materials such as roofing shingles, carpet, vinyl siding, etc. It is true that overall costs are lower, but only because indirect costs such as interest rates are lower than any time in recent history. It is a fact that anyone purchasing a home can buy an existing home for far less than the replacement cost to build that home today. Though that may be good news for those lucky enough to purchase a home in the next few months, this phenomenon will not continue long-term. Surprisingly, there seems to be people who believe that the horrible housing market will actually eventually push costs down in line with current home values. The fact is that for those who are involved in the housing market every day, it has become obvious that cost increases, not decreases, are on the very near horizon. Manufacturers of housing related products lowered prices through 2008 trying to spur demand. When it became obvious that demand wasn’t coming any time soon, manufacturers implemented mass layoffs, sold and/or consolidated assets, and restructured their pricing to be profitable, even in the worst-case scenario. Second quarter earnings for most all manufacturers showed that though revenues were down substantially, earnings were up. In other words, manufacturers have drawn a line in the sand. They are not going to lower prices further, because doing so will hurt earnings. Given the “lesser of two evils”, Wall Street prefers that manufacturers show higher earnings and margins than increased revenue at lower margins. They may not sell as much, but what they sell will be profitable. Adding to this is the almost assured reality that the Government’s efforts to help revitalize the economy will eventually result in inflationary pressures. The ultimate result: increased building costs, probably sooner rather than later.
• Fourth is a situation that I believe very few people see coming, and even fewer truly understand the complications that will ultimately arise. Few have noticed the absolute silence by the larger builders who have supposedly been so damaged during this housing downturn. Why do we not hear from CEO’s of such Companies as KB Homes, Lenmar and Toll Brothers? Possibly it is because they realize that the general public has very little sympathy for their current situation. But something else may also be a reason for their silence. It is estimated that more than 80% of the builders in the US are small builders. Many of these builders are family operations whose businesses support fathers, spouses, sons and daughters. Typically, these builders have low overhead, and can build homes for less money than the larger builders, even with the larger builder’s volume discounts through national accounts. These smaller builders are direct competition for the larger builders, and over the years have become the sole reason that larger builders cannot increase market share and margins. I am not suggesting that large builders are actively trying to put smaller builders out of business, but I am suggesting that large builders realize that the longer the housing downturn lasts, the less competition there will be when the market does turn around. Sometimes, silence can be deafening. And, it’s not just the loss of small builders that is concerning, it is also the loss of talent. My guess would be that the number of older craftsmen who have chosen to take early retirement rather than try to make it through these difficult economic times is staggering. The long-term loss of such talent and knowledge will be devastating to an industry that has had increasing concerns about less than stellar quality over the past several years.

The housing boom came and went, the bust appears to be stabilizing, and now the questions needs to turn to what comes next. A healthy housing industry is good for everyone. Healthy means that we don’t need any more booms or busts, just steady growth and reliability. Builders and investors need to provide quality homes at prices that are good for both the builder and the buyer. And, homeowners need to realize that their homes are not intended to be a source of immediate wealth, or an unlimited line of credit. As Americans we need to get this right this time.

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Finally…the housing bottom is in

The much awaited housing bottom…is apparently in. Today, the S&P Case-Shiller® home price index for April, 2009 showed, for the first time in almost a year, an actual increase in the average national home price. Now, the media didn’t exactly report the information quite this way, obviously because good news doesn’t sell as well as bad news. But, the fact is that year over year declines in home prices had escalated over the past year; reaching 18.7% on the March, 2009 index. The April, 2009 index showed only an 18% decline year over year. The index is somewhat difficult to understand, but the bottom line is that if you look at the average home price nationwide month to month, April was the first recorded increase in home prices in nearly a year. When you consider that this increase is occurring even as 50% of all sales are foreclosure sales, this is very encouraging. Imagine what the home pricing index would show if all the bottom-dollar foreclosures were taken out of the mix.

Speaking of foreclosures, don’t believe all the hype about a new wave of foreclosures coming later this year. It is true that more homes will slip into default as unemployed workers struggle to pay their mortgages. But, I believe that it is also true that Banks are very much aware that the market is bottoming, and that they stand a much better chance of getting the money they are owed if those homes are kept off the market, at least for now. If you think about it, it’s just smart business for the Banks. It’s like selling stocks; it’s just a “paper loss” until you actually sell. Because the Banks know that housing values are likely to increase over the next year or two, it is to their advantage to hold on to the assets rather than giving them away.

It’s unlikely that home prices will rebound substantially, at least for a while. But, it’s finally obvious that the long awaited bottoming of the housing market is finally here. Support the US Economy and go buy or build a home!

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$15,000 Tax Credit…again…Could it really be?

Yep! I’m not kidding. The $15,000 tax credit, for all homebuyers, has come up again. And, this time, the amendment appears to have bipartisan support in the Senate. Senator Johnny Isakson, a Georgia Republican, has once again brought up this bill as an amendment. But, this time it also has the support of Senator Chris Dodd, a Connecticut Democrat, and other Democrats.

 

The proposed bill would increase the current $8,000 tax credit to $15,000, and would extend the credit to ALL (yes, you read that correctly), ALL homebuyers. The tax credit could be taken over two years, and would be for purchases within one year of bill passage.

If passed as written, the bill would also eliminate the income caps of $75,000 and $150,000 for a single person or married couple respectively.

 

Over the past several weeks, it has become increasingly obvious that the $8,000 first-time homebuyer tax credit has been overwhelmingly successful. In fact, approximately 50% of recent home sales have been to first-time homebuyers. In one of my earlier blog entries, I pointed out that this scenario is skewing the average home price numbers to the lower end; thereby making it appear that home prices are falling further than they actually are. It appears that lawmakers have taken note of this situation, and are aware that in order to stabilize the housing market, incentives need to be provided to all homebuyers, not just first-time homebuyers.

 

If this amendment happens to pass, this would effectively be the last “nail in the coffin” for the argument that a housing market recovery is nowhere near. Housing market stability is critical for everyone. Homeowners need stability in home values, Homeowners need to be able to rely on building equity in their homes, businesses, and of course, their employees, need the added revenue that home construction provides. And, finally, local governments desperately need the tax revenues created by housing sales and related construction activities to fund schools, roads, police, firefighters, and others.

 

Here’s hoping the lawmakers put politics aside this time, and do THE RIGHT THING!

For a full overview of the amendment, go to www.bloomberg.com/apps/news?pid=20601103&sid=aQmrxrzY0jfE

 

Steve Wallin, President

Custom Homes of Asheville

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It just gets better and better

Just when you thought the incentives to buy a home couldn’t get any better, the Federal Housing Administration, on May 29th, 2009, just sweetened the pot.  The FHA announced on May 29th that they are now allowing the $8000 tax credit available to first-time homebuyers to be used for closing costs.  There is no doubt that the Federal Government is making every effort to make this time of crisis also a time of absolute opportunity for first-time homebuyers.  Remember that for the purposes of this tax credit, a first-time homebuyer is defined as anyone who has not owned a home in the past three years.  Don’t miss this!

 

For more information, check out this link:    

 

www.mercurynews.com/realestatenews/ci_12480568?nclick_check=1

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Does Building Green have to Cost a lot of GREEN?

I recently attended a series of classes to become a CGP (Certified Green Professional) through the North Carolina Association of Home Builders.  One of the things that was “hammered home” many times during the classes was that it really doesn’t have to cost a lot of GREEN to build green or healthy. 

 

One of the things you can do to build a more green home is to use some thought when positioning your home on the lot.   The concept of passive solar design can be as simple as positioning the home to best manage solar energy.  The idea that you have to have solar panels on the roof is simply not true.  The use of solar panels is a great idea, if it fits in the immediate budget, but if not, you can still make smart choices about how to utilize what nature has provided.

 

Another idea is to create a rainwater collection area.  For some, this may mean the installation of holding tanks to collect the rainwater so that it can be used for landscape watering at a later time.  For those on a tighter budget, a rain garden can be utilized; diverting rainwater to a specific area where water-loving plants are used.  The idea is to keep the runoff water on site, thereby reducing erosion.  

 

Even Energy Star® Certification doesn’t have to break the budget.  Using smart planning with regard to placement of windows and doors can make a huge difference.  Tightening up the building envelope is not as difficult as you might think.  In fact, a homeowner who is willing to take a weekend and several cans of spray foam, can fill voids around windows and exterior receptacles and light switches and the like to avoid areas of air infiltration.  It’s relatively inexpensive to do, but can make a measurable difference in the home’s ability to be energy efficient. 

 

It is true that you can spend a lot of money making your new home green and healthy.  But if you speak with a knowledgeable builder, you might be surprised just how inexpensive it can be.  The key is to be cost effective AND as energy efficient and healthy as your budget allows.

 

Steve Wallin, President

Custom Homes of Asheville  

 

 

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IT IS THE BEST OF TIMES, IT IS THE WORST OF TIMES

When Charles Dickens wrote “It was the best of times, it was the worst of times…”,  I wonder if he could have known just how fitting that phrase would be in today’s economic crisis.  As dire as our Country’s current economic situation is, it is also obvious that for many, these are times of tremendous opportunity.  Approximately 50% of the homes sales now across the Country are first-time homebuyers; taking advantage of unbelievably low prices and the $8,000 tax credit.  Home affordability has hit an all time high just as interest rates hit multi-decade lows. 

 

So, why is it that so many people who could buy or build are, instead, choosing to wait on the sidelines?  Obviously, fear is a major factor.  After last fall’s near collapse of the financial industry, and months of gloom and doom, it’s just difficult to take the plunge and make a large-ticket purchase of any kind, even if you know down deep, it is the right time.  Another factor is the lack of understand of the housing market, and all the myriad of indices that are used to calculate home values.  For example, most people do not understand that many of the “home value” numbers come from average sales price calculations.  In other words, add up the cumulative dollar amount of all the homes sold in a particular area, divided by the total number of homes sold, and there you have the average sales price.  You can read articles every day stating that average home sales prices have fallen 20% or 40%, etc.  It is assumed, possibly even implied by some articles, that this average sales calculation has something to do with the value of a particular home.  It actually tells you nothing of the sort.  The average sales price is simply a reflection of the type of homes being sold at a particular time.  First-time homebuyers traditionally buy less expensive homes.  So, it only makes sense that if 50% of the homes being sold these days are being purchased by first-time homebuyers, then of course the average sales price will be significantly lower that it was two years ago when the McMansions were being sold left and right.  Many people have a misunderstanding of such indices, and make assumptions about the housing market and home values that are simply not correct.

 

One such assumption is that lower home values equate to lower building costs.  This is absolutely not correct.  The housing market bubble occurred not because housing costs were tremendously out of balance, but because investors had artificially driven up home values.  In other words, rather than builders making 20%-30% above costs to build a home, some builders and investors, especially those in California, Florida and Arizona, had gotten accustomed to making 50%-60% or more.  What does all that mean?  It means that the 40% drop in home prices that have been seen in some areas have been from the unwinding of ballooned margins rather than a reduction in costs.  In other words, it costs the same today to build a home as it did two years ago, but builders and investors have had to realize that reasonable margins have to be maintained. 

 

So, how does this affect you if you are thinking of building a new home?  The reason that today’s environment is so attractive to anyone who might be thinking of building a new home is not because of a decrease in direct costs, because there have been very few, if any.  The attractiveness comes from the fact that mortgage rates are at lows not seen in decades, and unlikely to stay around very long.  It is also a fact that an unpleasant result of all that the Government has done to turn the economy around will eventually be inflation.  Costs are destined to increase, probably within the next 12-18 months. 

 

There is a definite difference between those who are trying to time the housing market to purchase a foreclosure property or short-sale, and those who want to build a Custom home.   If you are wanting to build your new home because you don’t want to settle for someone else’s dream home, then you should take a good long look at your current financial situation to see if it makes sense to move forward on plans to build now.  If your finances don’t allow for it at this time, then by all means, don’t take risks that you may eventually regret.  But, if your finances do allow you to move ahead with building a new home, don’t make the mistake of thinking that costs will decrease further in unison with home values.  There simply is no correlation between the two; no matter what some may try to lead you to believe.    The bottom line is that the very worst of times, may well be your very best of times.  Don’t miss the opportunity!

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The Perfect Storm

The Perfect Storm

 

This week has brought some glimmers of hope in the housing market.  From an unexpected increase in existing and new home sales to the announcement today that KB Homes, one of the Countries largest home builders, had a 26% increase in new home contracts last month, it appears that the housing market is beginning to stabilize.

 

Over the past several months, pundits have given their opinion of when the housing market would turn around, and when would be the best time for potential home owners to jump into the market.  If you are looking to purchase an existing home, I suppose there could still be room for argument as to whether the most opportune time to purchase has indeed arrived. But, what if you own, or are looking for land, and would like to build your own Custom Home?  Could there still be a legitimate argument that now is not the best time to move forward on that dream home you’ve always wanted?

 

Rather than giving an opinion, let’s discuss facts.  There are several things we know to be true about the current housing environment.

  • Interest Rates:  On March 26th, 2009, Freddie Mac announced that the current average interest rate on a 30-year fixed rate mortgage was 4.85%.  And, on March 27, 2009, John Koskinen, Freddie Mac’s interim chief executive officer, stated that interest rates are “   probably as good as it’s going to get” and the housing market is likely to rebound sooner than some forecasts.
  • Affordability:  The National Association of Realtors’ Affordability index for January rose to record levels.  Though there is no similar “affordability index” for land purchases, it is likely that the housing market’s decline over the past three years has also created tremendous opportunities for land purchases.  In other words, that perfect lot for your new home may never be more affordable than it is right now.
  • Availability of Builders and Subcontractors:  It only takes a few discussions with veterans of the building trades to realize that the housing downturn has created an industry eager to go back to work building America’s Homes.  Rather than the stress-filled, often less than Customer-oriented, environment during the housing boom, potential home owners who want to build a new home will definitely have their Builders attention.  
  • Lower Costs:  Costs for such things as lumber and drywall have hit multi-year lows.  Many suppliers, in an effort to bolster sales, are offering discounts or incentives; creating tremendous buying power.  Economists agree that an eventual affect of the government stimulus will be inflation.  Costs are almost assuredly going to move higher as the economy begins to recover.
  • Availability of Financing:  Despite all the negative commentary on the availability of credit, it is possible for those with good credit, and a reasonable down payment to get very attractive financing options.  Loans are not as readily available as they were a few years ago, and most people agree that this is a positive result of the housing downturn rather than a negative.  The bottom line is that for those who have good credit, and a reasonable down payment and/or equity, financing is available.

 

 

All of these items combine to create a sort of “perfect storm” for the housing market, and should be especially attractive for those who want to build a new home.  If you are in the market to build a new home, and it makes good financial sense to do so, there truly is a window of opportunity to build at the lowest cost in decades, and secure the lowest cost financing available since prior to World War II.  Don’t miss this opportunity!  

Steve Wallin, President

Custom Homes of Asheville  

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$15,000 for You!

Well it took a bit longer to get here than I had thought ( what was i thinking? It’s DC speed!) but last night the Senate passed the Isakson amendment to the stimulus/spending bill ( http://www.bizjournals.com/atlanta/stories/2009/02/02/daily76.html) .

What’s the Isakson amendment, you ask? Just the first major step towards actually dealing with the housing situation. It offers 10% of the purchase price of a home, up to $15,000, as a tax credit for the purchase of a primary residence during the twelve months following passage of the bill.

What does that mean for you, building your new home?  Well it may eliminate the bulk of your Federal tax burden. Not bad, you think. Couple that with extremely low mortgage interest rates, stable low material costs and quality labor availability and what do you get?  Your Dream Home!

But like all good things there will be a small window of opportunity.  As soon as building starts to recover costs will respond to the demand by increasing, good labor will get booked up and interest rates will head back to higher, more realistic numbers.

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