Home building struggles, some worry, for some time to come
By By Natalie Sherman and The Baltimore Sun
Aug 02, 2014 | 10:36 AM
Construction of new homes is lagging around the country, and Maryland is no exception.
Permits for new homes, which the U.S. Census Bureau tracks as a barometer of the home-building industry, fell 8 percent in Maryland in the first six months of this year compared to the same period in 2013. The number of single-family detached homes authorized for construction fell 15 percent.
That's worse than the country as a whole, where multifamily structures lifted permitting 5 percent through June. Permitting for single-family detached homes was flat.
"Things are picking up, but we're not at a healthy level at all," said Scott Armiger, past president of the Home Builders Association of Maryland and vice president of Orchard Development Corp., which stopped building single-family homes and started focusing on apartments during the recession.
Homebuilding has long been a key engine of the U.S. economy, accounting for millions of jobs and tax dollars. Recoveries from recessions in 1981, 1990 and 2001 were marked by significant gains in new housing starts.
This time, new homes have found some buyers at the higher end of the market as baby boomers downsize and families start looking to move up. But growth has not met expectations that the recovery would unleash pent-up demand.
Analysts said an unsteady economy has led to slower-than-expected household formation, particularly among younger adults, reducing the need for starter homes. Stringent mortgage underwriting standards make qualifying for loans difficult despite low interest rates. The rising cost of new construction also plays a role in pricing people out of the market.
Some predicted this year's slowdown would be temporary. But others forecast a more gradual than normal recovery, as buyers resist the idea of long commutes and builders face a shrinking supply of well-located land where they can construct homes within the reach of younger families.
"In the long term, homeownership is a great investment and people recognize that," said Thomas Baum, board member of the Home Builders Association of Maryland and president of Bozzutto Homes, which specializes in in-fill development. "To think that millenials want to continue to move farther and farther from the urban core to buy larger pieces of real estate — I think that notion is changing."
Permits for single-family detached homes in the Baltimore region numbered 2,058 during the first six months of the year, 18 percent fewer than in the same period in 2013. Permits fell 7 percent in Anne Arundel, 4 percent in Baltimore County and 39 percent in Howard.
Overall residential permitting, which includes apartments, fell 34 percent year-over-year in the region, which consists of Baltimore City and the five surrounding counties.
Statewide, the number of permits drawn in 2013 — almost 18,000 — was about 60 percent of the amount 10 years prior.
Armiger said his firm has no plans to resume building single-family homes soon.
"It's going to be slow and sustained for a number of years," he said. "I don't think we'll ever get back to the boom."
Home construction follows population and, in the last five years, 70 percent of the state's population growth came from Baltimore City and Anne Arundel, Baltimore, Montgomery and Prince George's counties, compared to less than 30 percent before the recession, according to an analysis by the state planning department.
Builders — who have preferred historically to subdivide and build on large open lots — have responded. In 2013, 53 percent of the state's home starts occurred in Montgomery, Prince George's, Anne Arundel and Howard counties, according to Metrostudy, a research firm that tracks the home-building industry.
"Builders are going where the demand is, and that's more evident in the strategically located suburbs," said Ben Sage, director of Metrostudy's Mid-Atlantic region.
But Maryland is one of the most land-constrained states in the nation, and there are few lots available for development in those established suburbs.
"The supply line is scarce," said Conor O. Gilligan of Glen Burnie-based Craftsmen Developers, whose firm sells permitted sites to homebuilders in Baltimore County and has sold four sites with spots for 20-100 homes to national homebuilders in the past year. "You have to be very creative to find decent in-fill development, which is essentially all that's left."
That scarcity, as well as the complications of building in a more established area, drive up prices, meaning the homes that get built are often out of reach for first-time homebuyers. Nationwide, the median price of a new home in June was $273,500, up from $245,200 two years earlier.
"A first-time homebuyer can't go out there and spend $300,000 on a first-time home," said John Kantorski, a real estate agent for Cummings and Co. Realtors. "Most people will wait until they find something that fits their price point, that fits their needs. Location drives it like it always has."
Unlike the boom years, when younger families appeared willing to move farther away to find a new home in their price range, younger generations are choosing to rent or buy a less expensive existing home, Sage said. That's one reason why the housing market for existing homes has fared better than new construction.
It's also driving a decline in homeownership rates, which dropped nationally to under 65 percent in the first two quarters of this year, according to census figures released Tuesday. In the Baltimore-Towson area, homeownership fell from 72.9 percent in 2006 to 66 percent in 2013, according to the census.
"The biggest issue [new home builders are] facing now would be the first-time homebuyers have kind of gotten squeezed out of the market," Sage said. "Perhaps when they get to that point in life when they've got family concerns, schools, pets, they want a yard, then that's when they'll start buying in the suburbs, but they really haven't been so far."
Sage said he expects to see that change over time, but only gradually.
"I'm not expecting millenials to just flood out there," he said. "We'll eventually see it become a larger part of the new building landscape, but it's been slower than I anticipated."
In January, the state asked its Sustainable Growth Commission to try to figure out ways to encourage development in the more established areas — an effort to reduce sprawl, as well as a desire to ease the development process. The commission published a draft July 21 with in-fill, redevelopment and revitalization recommendations, which include creating streamlined local approval processes and centralizing a database of the state incentives.
"Two things are coming together — the pickup in the economy and the trend for growth in those infill areas. … We're trying to capture that and encourage [it]," said Richard Hall, secretary of the Maryland Department of Planning. "That's not to say there won't be some pressure to build those large lots, McMansion-type products, but I think there's been a change that's going to continue forward even when the economy [recovers]."
The traditional dream of a home with a white picket fence and a yard remains strong, said Robert Denk, an economist with the National Association of Home Builders, which conducted a survey in 2012 of people who had bought a home in the last three years or planned to in the next three.
The association's survey found that 71 percent preferred a single-family detached home for their next purchase. It also found that 36 percent wanted to live in an outlying suburb, more than the 30 percent who dreamed of a close-in suburb, and the 8 percent who desired the central city. The remaining 27 percent opted for a rural environment.
Those percentages held fairly steady over time, said Rose Quint, assistant vice president for survey research, adding that she thinks it's premature to interpret the significance of other findings in the survey showing that preference for a new or custom built home dropped from 71 percent in 2004 to 55 percent in 2013.
"New homes are more expensive than existing homes," she said. "It's too soon to tell what's the real driver, whether it's a permanent shift in preference or just the economy."
Denk attributed this year's slowdown to "headwinds," such as families being unable to qualify for bigger mortgages and labor shortages after workers exited the industry during the downturn. But, he said, nationwide the drop in homebuilding is temporary.
"I'm skeptical of those sort of 'new normals,'" he said, predicting growth in the second half of the year. "You can't go five or six years without building. … As long as the population keeps growing and people want to keep living in houses, the demand has to come back."