Sales of new homes in the Baltimore metropolitan area took a tumble in the first quarter of 2000, dropping 11.3 percent from the correspondingperiod last year.
True, builders are concerned. Prices are higher. Mortgage rates are higher. The number of homes sold in the area dropped from 2,556 in 1999 to 2,266 - the lowest first-quarter tally since 1997 - but, as in the existing-home market, builders are blaming the decline on a lack of inventory.
Give me land, lots of land, builders say, and the demand for new homes in the Baltimore market can be satisfied.
According to The Meyers Group, a Washington firm that tracks and analyzes new home sales, the number of Baltimore area new-home projects actively being sold in the first quarter dropped by 17 percent. There were 53 fewer single-family home sites for consumers to look at, 25 fewer townhouse projects and four fewer condominium communities in the area. The number of Baltimore area building permits issued was off 13.2 percent compared with the first quarter in 1999.
"Demand in the Baltimore market is not the issue at this point. Supply is the issue," said Bob Coursey, marketing director for Ryan Homes, the largest homebuilder in the area. "That doesn't mean that the interest rates haven't been a factor, but that is not the driving force in Baltimore. "The number of sales in Howard County [down 15.7 percent for all builders] would be significantly higher if there were more townhouse and single family home sites available."
For the most part, builders are pointing to Smart Growth policies that have slowed new projects in the pipeline. Or as one builder said, "It's No Growth in Smart Growth clothing."
With fewer subdivisions coming through, the competition for developed land has heightened among builders.
"It is real tough. You are competing against everybody," said Linda Veach, executive vice president and general manager for Harford County-based Bob Ward Homes, the area's third-largest builder.
"The nationals are coming in and trying to buy up the land, and they have the money to buy it in bulk for cash. It is squeezing some of the little guys out," she said. "We have land in the pipeline ... but we are constantly looking for land."
Rick Kunkle, who is president of Patriot Homes, the metropolitan area's seventh-largest builder, said: "I see a shortage of land or developed lots in the pipeline in the next couple of years or maybe beyond. We are completing a lot of projects, and normally there would be replacement projects or new developments, and they are very slim. A lot of Smart Growth, No Growth politics is creating a shortage of land, therefore prices are going to go up."
Kunkle, like other builders, said factors such as higher labor and supply costs have influenced prices, but rising lot prices from developers has been the driving force.
"Up until last year, land prices have been relatively stable. But new deals that we are looking at are up in price considerably over three years ago - as much as 20 percent," Kunkle said. "Three years ago, we had a project in Howard County where the lots averaged about $75,000 a lot. And the latest contract I got, the average price is $100,000 a lot. Same lot size, location, same everything.
"In Baltimore County one location we were paying $65,000 a lot, the lots that are being offered in the same area are now being offered for $80,000."
Said Veach: "With developers it is greed, but it is business. It is the way of the world. They have all this competition to get land, so they want the best terms. If I was a landowner, I would do that too."
Consequently, consumers - especially in Anne Arundel and Howard counties - should be noticing higher new-home prices across the board. The average base selling price for a single-family detached home in the first quarter of 2000 in the Baltimore area rose 9.9 percent to $261,108, according to The Myers Group. In the first quarter of 1996, the same product cost $216,761.
Townhouses rose 3.3 percent to $133,301 and condominiums were up 6.7 percent to $119,780. According to The Myers Group, in Anne Arundel County the average base selling price of a single-family home rose 19.7 percent from $265,240 to $317,630. In Howard County, it went from $280,649 to $310,352.
With a robust economy, high consumer confidence and a more stable stock market, it seems inflated prices haven't dampened demand.
"We are busier than we have ever been," Kunkle said, adding that Patriot Home sales were up 29 percent over the first quarter in 1999. "We have more houses under construction than we've ever had, and the market has been as hot as I have ever seen and I have been around here for 25 years."
According to Anna Pitheon of The Meyers Group, builders still may have some room to raise prices without slowing sales because the gap between what builders are asking for their models and what consumers are spending is narrower now than it was in 1999. Pitheon said a narrower spread tells builders there is room to raise prices.
"Our average price has probably in the last year has gone up about 12 to 14 percent," said Michael Kingsley, head of the Maryland Division of D. R. Horton Custom Homes. "But I think a large part of that is based on people choosing larger houses with more in them."
Kingsley added that he doesn't think higher prices will choke off the market, rather, "people will kind of adjust."
Another aspect that revealed the confidence in the market was that cancellation rates - contracts voided by buyers for a variety of reasons - were down by almost a third when compared to the first quarter of 1999.
Nevertheless, Pitheon warned, there is a fine line between what the public will and will not tolerate.
"I think prices need to slow down a little bit, especially if we are looking at another couple of interest rate bumps," Pitheon said. "It really does put the consumer in a double squeeze ... can they really afford the home that they've set their sights on, or do they stay put? I think it is something that builders should keep a real eye on."
While some builders are keeping an eye on prices, others are doing the same with mortgage rates.
In the new-home industry, consumers are more sensitive to mortgage rates, since they usually can't lock in a rate until 60 days before the projected completion date. Therefore, they are at the mercy of the financial markets, and in the past year, rates have gone from 7.5 percent to 9 percent.
"When interest rates go from 7.5 to 8.75 over the course of a year, that does create not only some concern, but in very real terms some people who qualified a year and a half ago or a year ago don't qualify today," said Ryan Homes' Coursey. "You have to be offering different financing products."
Coursey said Ryan has started to offer a mortgage program with a below-market fixed-rate mortgage as a marketing incentive. The company is also giving customers who use its NVR Mortgage company interest-rate protection until settlement and the ability to refinance for free for a two-year period after settlement.