Michael DeStefano is conducting an experiment, and the outcome will go a long way in determining what direction he will take his home-building business.
"It's a test on whether we can build 40 miles away from where we are used to building and to see if there is a market there," said Michael DeStefano, president of Anne Arundel County-based Sturbridge Builders, who has purchased 20 lots in Coventry Farms in Chestertown, at the other end of the Bay Bridge.
DeStefano is like a number of Baltimore-area builders - large nationals and smaller independents - who are edging away from the region and finding more fertile ground for housing developments in Pennsylvania, Delaware, the Eastern Shore and Southern Maryland.
It's not that they are abandoning the Baltimore region, but with fewer development opportunities and soaring land prices, uncertain outcomes to lengthy approval processes and the state's Smart Growth policies, homebuilders are expanding their reach.
Newspaper ads from Ryan Homes, the area's largest homebuilder with almost 17 percent of the Baltimore market, reflect the change.
In a July 2000 full-page Sun real estate ad, Ryan marketed 38 Baltimore-area communities vs. seven outside the area: one in Calvert County; one in Cecil County; two in Queen Anne's County; one in Chester County, Pa.; one in York County, Pa.; and one in Sussex County, Pa.
In last Sunday's ad, Ryan advertised 32 Baltimore metropolitan communities vs. 20 outside the area, including six along the Delaware beaches, four in York County, Pa., four in Cecil County, three in Calvert County, two in Queen Anne's and one in Talbot County.
And that is all within a two-year period.
Ultimately, that affects not only Baltimore-area consumers, who are seeing fewer new-home choices and higher prices, but also municipalities and builders.
"I think there was a time when many builders would have said there is no market in Cecil County," said Bob Coursey, marketing and sales director for Ryan Homes. "However, once builders started offering new home communities in Cecil County, a market was created. Once the builders started building, the buyers started to see that Cecil County was a very viable option based on sales prices vs. commute. Same thing in our Pennsylvania communities."
Coursey said about 20 percent of his Baltimore-area sales come from communities outside the traditional metropolitan region of Baltimore, Carroll, Anne Arundel, Harford and Howard counties.
"Two years ago, 100 percent of our business was in the Baltimore metropolitan area," said Bill Luther, president of Harford County-based Gemcraft Homes, the fourth-largest builder in the area.
"This year, it will probably be 60 percent Baltimore, and next year it will probably be 40/60 - 40 percent will be Baltimore and the 60 percent will be Delaware, Pennsylvania because of the land availability."
Availability of land for housing developments is the lifeblood for builders. In the past five years, land has become scarcer as jurisdictions have slowed or shut down the development process and Smart Growth policies have tried to persuade builders to turn inward to redevelop aging and neglected suburban neighborhoods.
Pat Keller, director of the office of planning for Baltimore County, sympathized with builders but said the "trick is not to do leapfrog" development over one county in favor of a county where the financial grass may be greener.
"Just fleeing? Is that a solution?" he said. "To me it was always a sort of balancing act of new vs. existing stock. ... Yes, at some point the land supply will run out and then you are left with options that are more difficult, but still doable, I think.
"Obviously, the supply is decreasing; it doesn't take a genius to figure that out."
Nevertheless, Keller added, "the big open boom thing is a thing of the past. You ask yourself what are the implications: Is it good or bad? Some of the consequences are supply and demand, decrease and increase and certain units are going to skyrocket in price, and that drags other units as well."
And with builders competing for fewer parcels and buyer appetites at all-time highs, new-home prices in the Baltimore area have climbed and still are.
"What we have seen happen is the available lots have dried up, the prices have gone through the roof. With lots drying up, it makes builders tend to want to look other places to find the work," said DeStefano, who also is president of the Home Builders Association of Maryland.
"Ten years ago, Queen Anne's County was always kind of a crapshoot because if you could buy a $130,000 townhouse in Anne Arundel County, why do you want to deal with that [Bay] Bridge? But now [with] townhouses at $250,000, I'll go over that bridge and get a nice single-family house for $250,000 on an acre of land.
"The lack of growth areas in the core, where we really should be growing, is really creating the demand outward because the prices sare going up so much."
According to the Meyers Group, a Washington firm that tracks and analyzes new home sales, the average base sales price for a home through May in Anne Arundel County was $268,349; through May 2001, it was $217,084. That means an increase of 23.6 percent.
At the end of 1997, the average price of a new home in Anne Arundel County was $165,696.
'Significantly higher'
"Certainly [there are] higher prices across every product, every price point, across every county ... no doubt very significantly higher prices," said Ryan's Coursey.
Within a year, the average new-home base price in Baltimore County has risen 33.4 percent, to $247,244 from $185,346; Howard County had a 13.2 percent increase, to $350,455 from $309,514; Harford County a 6.8 percent rise, to $192,554 from $180,278; and Carroll County a 6.5 percent gain, to $216,316 from $203,186.
DeStefano calls it "Marketing 101 ... the supply is driving the price." And as he sees it, at least in Anne Arundel, the supply isn't there to meet the demand.
"Look at all of the PUDs [planned unit developments], they are almost all totally complete and there are no significant planning developments on the books even," DeStefano said.
"You realize that 10 years ago what we had going at one time. We had Walden. We had Seven Oaks. We had Russett. We had Piney Orchard. We had some major developments. Planned communities. That was about 40,000 or 50,000 lots. Russett is done. Walden is done. Piney Orchard doesn't have a whole lot left."
Luther of Gemcraft Homes saw this evaporation of lots two years ago and knew that if the company was going to continue to be viable, Gemcraft was going to have to evolve and expand its horizons.
"What really made us expand quicker than what we may have done is that we could see the land availability just wasn't going to be there for us," Luther said. "So we figured we better get out and go to some other areas and make sure we had land position in other areas. We just saw a cycle where there was not going to be the land availability in the Baltimore metropolitan area."
Luther also realized that competition for land was becoming vicious. To assure his company of land positions, he decided to become his own developer.
Typically, developers would purchase the land, finish the lots with roads and sewers and then give builders options to purchase lots in incremental stages, therefore limiting a builder's financial liability.
But then the land game changed for builders as the Baltimore housing boom took off and competition stiffened.
"We realized that there was no way we could depend on developers to supply us with lots, so we decided we had to get into the development game and be a developer," Luther said.
From that point, Gemcrat Homes began to build in places other local builders hadn't considered, such as Pennsylvania and Delaware and on the Eastern Shore.
"We got into the Delaware market about 2 1/2 years ago, and we also bought land positions in Chester County, Pa.," said Luther.
"In Chester County, which is more of a Philadelphia market, we have seven different subdivisions of about 700 lots. In that market, all of the nationals have come in, land prices have gone up. But since we went there two years ago, we were able to make some decent deals."
In addition to corporate offices in Harford County, Gemcraft has opened three regional offices to cover operations that span 13 counties in three states.
"For the land that is [in the Baltimore region] there is so much competition that the end price gets to be so great that we don't think we can offer a value to the consumer," he said. "The prices get so high it just doesn't seem to make sense. So by expanding out we've been able to increase our land position."
Though the homebuilding industry is often portrayed as a destroyer of farmland, there is another aspect for the public and politicians to consider.
"Think about it from a community standpoint," said Fritzi Hallock, president of MarketSmart, a consulting firm for builders. "When you have a homebuilding company that is based in Harford County and they start building in Cecil County and they start building in Newark and New Castle County [in Delaware] and they start building elsewhere, instead of giving a $1,000 to the Harford County elementary schools for computers, they give $1,000 to the Cecil County schools for computers.
"Instead of paying for salaries for people who live in Harford County, they are paying some local people who live in Cecil County. Instead of joining the Rotary in Harford County, they are joining the Rotary in Cecil County.
"They are a local business. They want to support their local community. That's where they live. But if their business starts moving elsewhere, then they have to look at their business time and their community service time for that business and see where am I going to be best served, and it is going to be out of their home county. They don't want to do that."
Baltimore-area builders are being labeled carpetbaggers, said Jay Decker, director of market research for Builder's 1st Choice, a Columbia marketing firm that has approximately 80 local builders as clients.
"They are looked at with disdain," Decker said. "But they go in there and they are fearful. They don't know some of the local customs and habits.
"They have fear and trepidation because they are going out of their comfort zone. They know the Baltimore metropolitan area well, and they've grown accustomed to that market. They know the schools. What's a good area and what isn't."
According to his research, virtually all of Builder's 1st Choice business in 1999 was concentrated in Maryland except for one Pennsylvania project.
As far as N.C.
Today, Maryland accounts for 78 percent of its marketing business, and it is doing business not only in communities in Pennsylvania and Delaware, but also in Virginia and North Carolina.
"A lot of these areas where they have a very low tax base want the growth. They want you to come there. They are welcoming you with open arms," Decker said. "Where in the more populated areas - Baltimore being ground zero - of course there is less land and there are pressures on schools ... whereas in the hinterlands they want the growth."
Do the local counties understand what is happening in the marketplace?
"I think they have heard what is happening, but I don't think they necessarily believe it," said Anirban Basu, director of applied economics at the RESI institute of Towson University.
"They are aware that homebuilders are claiming that not enough land is going to residential purposes. But they are not convinced that they are at the point to where they need to do something about it.
"Practically speaking, very little is being done about it. If home prices continue to spiral and enough constituents complain about the growing deterioration of housing affordability, we may begin to see some action among policy-makers."
Affordability is a key issue. With record low mortgage rates taking some of the bite out of rising home prices, getting first-time buyers into a home is tough, but not impossible.
When the economy heats up, so will mortgage rates, and buyers coming into the market with no transferable home equity may be left behind.
According to Fannie Mae, a person earning $50,000 a year can afford a mortgage of $164,800 based on a 6.5 percent, 30-year loan. If the interest rate goes to 7.5 percent, that person will be able to qualify for a $149,000 mortgage; at 8 percent, the loan drops to $141,900.
"If you are rich enough to fend for yourself in the market, fine. But if you're not - if you're in the middle class and you can't afford a $400,000 home - I'm sorry, you're out of luck," Basu said.
Therefore, Keller, at the Baltimore County Office of Planning, said county residents should be thinking about how they want growth to occur.
"Do we look at green [space]? When would it be appropriate? At what point would it be appropriate? Because there has been supply available, we really haven't gotten into that. However, the next look is going to have to be to ask that question and the residents of Baltimore County are going to have to make that decision."
Still, few would argue that builders, despite land shortages, are financially suffering. In fact, the building business is one of the few economic sectors that is still riding high.
"They would be right that homebuilders are not going out of business necessarily," Basu said. "But they are not staying in business by building in the Baltimore metropolitan area, they are staying in business by finding land in Cecil County or Calvert County or southern Pennsylvania. And it is not clear that that is a good outcome for the people of the Baltimore metropolitan area."