Sharply rising interest rates and weak consumer confidence drove new home sales in 1994 to their lowest point in four years, Legg Mason Realty Group Inc. said yesterday in its quarterly survey of Baltimore-area homebuilders.
Sales of new, single-family homes, townhouses and condominiums fell 14 percent, from 10,412 in 1993 to 8,998 last year, the realty group said. Sales had been climbing steadily each year since 1990, when 8,232 homes were sold.
Baltimore shared the downturn with neighboring regions, as new home sales from Philadelphia to Northern Virginia slid 8 percent. Sales slowed in Baltimore and all surrounding counties but Howard, where new communities opened in Columbia and Elkridge, Legg Mason said.
"Last year had the potential of being a reasonable year," said Robert M. Lefenfeld, senior vice president of the realty group, which tracks new subdivisions of 20 homes or more. "Obviously, national monetary policy had a devastating effect on the mid-Atlantic as a whole, which was not recovering as well as the rest of the country."
The Federal Reserve raised short-term rates six times in 1994 to ward off inflation. Rates on 30-year, fixed-rate mortgages climbed steadily after bottoming out at 6.83 percent in October 1993, reaching over 9 percent by the end of last year.
"The only thing that held back a peak year in 1994 was the interest rates," said Dwight S. Griffith, president of the Home Builders Association of Maryland. "For every point in the interest rates, you take out a segment of the population that can't buy as a result."
When rates tumbled during 1992 and 1993, "the universe of potential homeowners expanded substantially, without the expansion of the population base," Mr. Lefenfeld said. "All of a sudden, people could afford to buy."
But 38 percent of potential buyers of an average $200,400 new, single-family home found themselves eliminated from the market a 3 percent increase on 30-year fixed mortgage rates, a Legg Mason analysis showed.
That rate increase eliminated 26 percent of potential buyers of an average $117,450 townhouse. And 6 percent of potential buyers of an $87,700 condominium could no longer afford to buy, the survey showed.
"It's been slow. People just quit looking," said Dave Hoagland, a sales consultant with Mount Bay Homes, which builds single-family homes in Owings Mills starting at $148,000. "I've sold new homes 15 years, and this is the slowest time I can remember."
Single-family homes have accounted for a bigger and bigger share of the market each year since 1990 -- until last year, when market share slipped from 48 percent to 44 percent. At the same time, townhouses have begun making up a bigger share of the market, 38 percent in 1994, compared with 35 percent in 1993.
Those numbers show that some potential buyers of single-family homes instead chose to stay put or refinance their current home. Many potential buyers of townhouses -- often purchasing their first home -- chose to buy rather than pay rent, Mr. Lefenfeld said.
As interest rates continued to rise, most builders responded with incentives averaging $5,107 in the fourth quarter -- everything from paying points on a mortgage to offering a finished basement as standard.
Ryan Homes, through its mortgage company, began offering a program in which buyers can lock in a mortgage rate with the option of refinancing later at no cost.
"It has helped significantly, because there is some uncertainty," said Sharon McKeown, a sales manager."
Builders expect the pace of new community openings to slow in the coming year.
"This year, no one thinks it's going to be better in 1995," Mr. Griffith said. "The question is, how much will it decline? We'll have to work harder to get sales."