- The Washington Times - Wednesday, February 28, 2007

Last year was a gloomy one for real estate in the Washington area, and home builders didn’t fare any better than the rest. New-home sales were down 20 percent last year. In fact, it was the slowest year for builders since at least the 1980s.

Can things turn around this year? Is a rebound possible, considering how the entire region has become a buyer’s market?

“If we haven’t hit bottom, we’re pretty close,” says Victor Furnells, regional sales director for Hanley Wood Market Intelligence. “And I think we’re going to stay at that level for a while. But by the third or fourth quarter, the local market should return north with rising sales.” As sales fell last year, builders had to make adjustments to a market that favored buyers instead of sellers.

In the existing home market, which saw sales drop 23 percent last year, that change in market forces caused time-on-the-market figures to go up and prices to go down. As sellers understood what was happening, they began lowering their expectations, spiffing up their homes and offering buyer incentives.

New-home builders used many of the same strategies.

“They are doing the right things, like reducing their standing inventory and land options,” Mr. Furnells says. “And they are often working with their vendors to get lower costs on building materials so they can improve their margins.”

The most important adjustment one can make when the housing market slows is to think carefully about your asking price. This is true whether you are selling your childhood home in Bowie or a brand new condo in Bethesda.

However, builders of new homes and private homeowners often handle price adjustments differently.

“The new home market adjusts more quickly and stabilizes before the resale market does,” according to Clark Massie, president of TETRA Corp.

“This is a business for home builders, so they don’t have the same emotional attachment that a homeowner has. Consider the large, publicly traded builders. Their stocks have been hit. Many of them have taken huge write-downs in their land values. But after that, they are ready to move those properties at reduced prices. So they are more highly motivated than a homeowner to take that financial hit and get on with business.”

This connection between the sales climate and new home prices is most clearly visible in the condominium market.

The region’s condo market was flying high in 2005 and slowed dramatically in 2006. After appreciating faster than other housing types, condos were suddenly out of favor.

Dozens of new condo projects were under way when the slowdown occurred, so builders had to act quickly. Some converted the buildings to apartments for rent. Others adjusted their pricing to suit the market forces.

In almost every local jurisdiction where sales fell last year, prices went down as well. But, in the few places where condo sales rose, prices did too.

In Montgomery County, for example, condo sales fell 16 percent last year, and the median price per square foot went from $465 to $432, a drop of 7 percent.

In Fairfax County, sales dropped 55 percent, and prices went down 6 percent.

However, in Prince William and Prince George’s counties, the opposite occurred. Sales of new condominiums were up 20 percent in Prince William last year, and prices rose 8 percent.

Prices in Prince George’s County shot up 22 percent as builders enjoyed a condo sales jump of 57 percent.

Affordability surely has something to do with all of this. The region’s most expensive condo markets are the District, Arlington, Montgomery and Fairfax. Condo sales fell in all of these jurisdictions.

Condo sales rose, however, in Howard, Prince George’s and Prince William counties — some of the more affordable places to buy a new condo last year.

Another reason condo builders were so quick to lower prices last year was their incentive to free up their capital and invest elsewhere.

“Remember that an unsold condo provides the builder with zero income; they don’t rent them,” Mr. Massie says. “So there is money tied up in the property. A homeowner trying to sell, on the other hand, he needs to live somewhere. So he’s living in the home and doesn’t have the vacancy expense that the builder has.”

Another difference between the resale market and the new-homes market is how the new sales climate affects large companies and the thousands of people who work for them.

“The last thing builders want to do is eliminate staff,” Mr. Furnells says. “Many of them are retraining sales force, training them to be more flexible with consumers, to listen more than they talk. You realize how important this is when you learn that 70 percent of the sales staff has been in this industry for less than 3 years.” Apparently, some home buyers are taking advantage of such inexperience.

“We’ve heard about consumers who actually sign a contract and pay a deposit of as much as $50,000, and then use that contract to haggle with other builders,” says Mr. Furnells. “They tell a builder at another development: ‘I’m willing to walk away from my deposit if you will give me a great deal.’ ”

That is certainly a creative, but perhaps unethical, approach to home shopping when market dynamics are shifting around the way they are these days.

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