- The Washington Times - Friday, April 12, 2002

Home builders in the Washington area are a resilient lot. They have to be. The home-construction industry can be volatile, subject to factors as varied as lumber prices, interest rates, land availability, local legislation, weather and the mood of home buyers.

In recent years, builders have contended with a lack of skilled subcontractors, increased regulation and limited availability of key building materials. In other years, steep hikes in the cost of lumber caused new-home prices to rise dramatically.

Last year's problem was a shortage of land ready for construction. This caused new-home sales to fall sharply, even though demand among home buyers was fierce all year long.

That land shortage has continued into 2002, and it is the one factor that could slow down builders this year.

"Realistically, I believe this year will be quite strong," says Clark Massie, 2001 president of the Northern Virginia Building Industry Association and president of Tetra Corp. "I think the effects of [September 11] have subsided and that local job growth has actually increased as a result. That means there will be more people moving here and needing homes, but builders need land to build on."

The land-shortage issue continues to be a problem this year, simply because preparing land for development is a process measured in years.

"The time and effort of trying to find, contract, zone and engineer land is keeping builders quite busy right now," Mr. Massie says. "They have to worry about their immediate needs and their future development at the same time."

Planning for the future isn't easy when you are a home builder. Most try to have three to five years of land in their inventory. Determining how much you need, however, can be difficult. If you have too much idle land, it costs you money. If you don't have enough land moving through the process, you might be caught short. That's what happened to many builders recently.

They bought plenty of land in the late 1990s, but the sales boom of 1999 and 2000 gobbled up much of what they had. Now, with stricter regulations and higher prices, land is scarce and everyone wants it.

"Land is short; everyone is talking about how hard it is to find," says Peter Bisset, regional sales director for the Meyers Group, a real estate information firm. "Builders are having to look at their product line and make adjustments. They may even have to tweak the product in a development that is under way."

When large tracts of ground aren't ready for the development of planned communities, many builders turn instead to "in-fill." These are smaller plots of land that can accommodate a single home or maybe a cluster of town homes. Because home prices are so high these days, some builders even find it profitable to buy older homes in poor condition, tear them down and build something new in their place.

"Just last week, I was talking with a local builder who only builds a dozen units a year," Mr. Massie says. "They are content with being a small builder, and they used to have their market pretty much to themselves for single-lot construction, but now, they tell me, even the big national builders are buying up small lots. Apparently, they need projects to keep their folks busy."

Because of land shortages, builders also are beginning to look in new directions to buy land. Areas such as Fauquier County, Washington County and the Eastern Shore of Maryland are attracting interest from builders who had never before considered them.

One danger of such development is that it will only exacerbate the area's traffic congestion. As builders have been forced to move outward to find available land for construction, some outlying counties have begun passing slow-growth legislation that can hinder development.

"When areas like Loudoun County decrease the density of new-home communities, they force the development to leapfrog over them farther out," Mr. Massie says. "So you aren't relieving your traffic congestion, you are just forcing people to drive farther to get to work."

"We are getting more requests than ever for information about local legislation," Mr. Bisset says. "The tightening of land availability and the red tape you have to go through to get developments approved are hurdles many builders are finding difficult."

Another factor that could hurt sales this year is the cost of buying a new home. Existing-home prices shot up dramatically in the past few years, which elevates the price of all homes in the area. In addition, land inside the Beltway has become scarce as the Washington area has grown. It is, therefore, more expensive.

According to Meyers Group data, new-home affordability dropped to 40 percent in 2001, down from 43 percent in 2000. That means only 40 percent of area residents can afford to buy a new home.

When you add the constantly rising prices of building materials, labor and county fees, it is easy to see why new-home prices go up almost every year.

They go up in some counties more than others, however. Prince William County now demands a $17,000 cash proffer for the construction of every new home. This fee is supposed to offset the county's cost of building new roads, schools and sewage systems.

"The theory has been that new-home buyers are coming from outside the area, so they should pay for the impact they are having on a community," Mr. Massie says, "but our association is doing a survey to determine the buying profile of new-home builders, and so far it looks like three-quarters of new-home buyers in Fairfax County come from Fairfax County."

Despite all the challenges before them, new-home builders are likely to have a better year than in 2001. Data for the first few months of this year are encouraging, and sales are up in many parts of the area, but it won't be until later this spring when the real estate market peaks that we'll know just how this year will shape up for area builders.

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