- The Washington Times - Friday, March 6, 2009

Only 11,200 new homes were sold in the Washington metropolitan area last year - a drop of 32 percent compared to 2007. For comparison, the area saw an average of about 26,000 new homes sold each year from 1991 to 2006. Last year was the slowest year for area homebuilders in at least 20 years.

So, after such a depressing year, where do builders go from here?

“The strategy all good CEOs have now is planning for the recovery,” says Tom Farasy, 2009 president of the Maryland-National Capital Building Industry Association.

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“It is time to get your house in order, make changes, consider how your company is going to be positioned for the recovery. Now, it’s easy to say that, and it sounds terrific. But, for today, things are awful. Every day, there are awful stories out there.”

It’s not just hard on new-home sales and homebuilders, of course. Every sector of the real estate industry is struggling these days. Existing-home sales in 2008 were down 39 percent compared to 2004, which was the peak of the recent seller’s market.

“Things are very dire out there right now,” Mr. Farasy says. “All our builders have been going through three, four, even six rounds of layoffs. Some of those people have been with them for years, so it hurts personally. You don’t want to do it, but have to do it to survive as a company.”

What a difference a few years makes. Not long ago, in 2005, builders reported that they couldn’t find enough construction workers to build the homes that were being sold. Buyers had to wait up to a year for their homes because skilled labor was in short supply.

Not anymore.

“Everyone is hanging on by their fingernails,” says Debbie Rosenstein, 2007/2008 president of the Northern Virginia Building Industry Association.

“Our members have downsized as far as they can go and still have an operation. They’ve diversified, doing anything they can from remodeling to on-your-lot building. We’re all trying to be creative, but it’s just no fun right now.”

Adding to the builders’ troubles is the difficulty banks and lenders are having these days. Few homebuilders have the financial resources of their own to buy land, develop it, purchase materials and pay workers - all before they sell a single home. It simply takes a lot of money to build homes, so builders rely on lenders for acquisition, development and construction (ADC) loans.

“Credit lines for ADC loans are frozen right now, so there are a lot of projects that are standing still,” Mr. Farasy says. “We need our lenders. Even the big builders have walked away from projects and pulled out of counties.”

Ms. Rosenstein adds, “Builders are building on what they have already, but starting anything new is almost impossible because you can’t get financing.”

To mitigate some of the financial challenges for homebuilders these days, Mr. Farasy and his organization are negotiating with the counties they serve to make some temporary changes.

“First, we are asking that all plan and permit expirations be extended for two years,” he says. “The logic is that when the recovery does come and people start buying, we don’t want to spend time redoing permits. We want to build, so people will buy homes. When people buy homes, the county gets taxes. And we can hire people, and those people will shop and buy food, which helps the whole economy.

“The second thing we are asking for has to do with the impact and surcharge fees that typically run $30,000 to $40,000 per home. Most of the time, these have to be paid at permit time. But, we are asking that these fees be deferred, to be paid at the time of closing and occupancy - when we’ve actually been paid for the home,” Mr. Farasy says.

Many are hoping that 2009 will be the year real estate turns around. Existing-home sales started to rebound in the Washington area in the latter half of 2008, but that had a lot to do with bargain hunters snapping up great deals in parts of Northern Virginia.

Recovery for the new-homes market is a longer process, and a more complicated one.

“This whole thing the country is in right now was first housing issue, then it was a mortgage issue, then it was the stock market and now it’s an issue with the overall economy,” Ms. Rosenstein says. “We’ve been in this for almost four years now, and that’s a long time for anyone.”

If 2009 is going to be a better year for new-home sales, affordability is going to be an essential part of the solution.

“New home prices have already come down and some predict they’ll come down more,” Ms. Rosenstein says.

Anyone who reads the news knows that existing-home prices have fallen a lot in recent years. In Fairfax County, for example, the median sales price for 2008 resales was 19 percent lower than in 2007.

For new homes sold in Fairfax last year, the median price per square foot was down 14 percent. Since 2005, the median price per square foot has fallen 56 percent.

However, you aren’t really comparing apples to apples when you compare resale and new-home prices.

“What you can’t see in the new-home statistics is that the buyer got $50,000 in upgrades and additional features thrown in by the builder,” Ms. Rosenstein says.

Still, even if prices for new homes aren’t headed lower, there are other things happening that could stimulate buyer activity this year.

The $8,000 tax credit for first-time homebuyers could help. Low mortgage interest rates are usually a boost to real estate activity. On the other hand, rates were low last year too, and that didn’t seem to help much, did it?

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