Longtime local builders cautiously optimistic about new homes market

August 11, 2013|By ARNOLD S. PLATOU |
  • Joe Schaefer of Hagerstown stands outside his newly built home in the north end of Hagerstown.
By Colleen McGrath / Staff Photographer

Washington County’s homebuilding industry is off to its fastest start in five years, although the number of houses under construction is still far smaller than before the recession.

From January through July, the county and Hagerstown governments issued permits for construction of 166 houses — 55 percent more than the 107 home start permits issued during the same period last year.

Things are better, but longtime local builders are only cautiously optimistic about what it all means.

“I’m encouraged. The calls are starting to come in a little more now,” said Dennis Swope, president of Home Construction Corp. of Hagerstown. “People seem to be a little more interested in buying.”

Carl Vogel, sales coordinator at Oliver Homes, one of the county’s bigger builders, said conditions overall look good.

“We’re definitely seeing more activity. We are seeing lots of inquiries for people for new homes. Interest rates are still fantastic. (They) seem to have continued down that path of being new opportunities,” Vogel said.

Vogel should have a good grasp of what’s been happening recently. He was last year’s president of the Home Builders Association of Washington County.

“Lots of Realtors are saying that the inventory of existing new homes is low, across the (price range) board to some degree. So customers are out looking. So it’s all positive in that regard,” Vogel said.

But the market continues to face challenges, Vogel said.

“Folks still have the same hurdles — houses to sell first, (and) finding home lots they would like,” he said.

Vogel pointed out that the 55 percent gain thus far this year might not be as significant as the number indicates, given how much the homebuilding rate lags those in pre-recessionary times.

“Fifty percent increase of 2, is 3,” Vogel said. “It’s relative.”

By another measure, any increase is vital to many local families, whose incomes are dependent on jobs throughout the home-building industry and its feeder industries.

As the market grows, so, too, does activity and need for workers in banking, mortgage lending, and in stores that sell furniture and appliances, as well as landscapers, asphalt paving companies, newspapers and a host of other businesses.

Ups and downs

In the rip-roaring days before late 2007, when the nation’s recession officially began, the county’s homebuilding and real estate economic engines were running full throttle.

The high-octane fuel was the subprime mortgage lending nationwide that gave credit to almost anyone, drawing many ordinary Americans into the market to buy a house or, as investments, even two or three. As demand rose, prices jumped to record levels.

In Hagerstown and throughout the county, home starts shot up from 1,187 in 2004, to 1,425 in 2005, according to figures kept by the county Division of Plan Review & Permitting and the Hagerstown Planning & Code Administration.

In the meantime, total sales of all existing and new houses here rocketed from $394 million in 2004 when 1,922 were sold, to $573 million in 2005 when 2,237 were sold, according to data from Metropolitan Regional Information Systems Inc., or MRIS.

But by mid-2006 and into 2007, Americans in communities throughout the nation were beginning to realize the riskiness of the loans and adjustable-rate mortgages many had just received. As interest rates readjusted higher, mortgages became harder to afford.

Demand for houses began to fall. Credit tightened, values plunged and millions of new homeowners, owing more money than their homes were now worth, faced foreclosure and bankruptcy.

Sales of new and existing houses throughout the county dropped from $573 million in 2005, to $415 million in 2006, to $291 million in 2007, to $226 million in 2008. By 2009, they had fallen to $211 million and were about to drop even more.

Local home starts plummeted in 2006, falling from 2005’s 1,425 peak, to 659. They dropped to 432 in 2007 and to 330 in 2008.

In 2009, new home starts were down to 162. That was barely one-ninth of the number of houses begun here during 2005’s economic explosion.

Mixed results

Federal programs to encourage home buying as well as to lower loan interest rates and hold them down, have helped.

But the economic road to recovery here and across the nation has been bumpy.

In the county, the real estate market bottomed out at $183 million in 2011, inching upward to $187 million last year. The trend in home starts was almost as unreadable, with 185 houses begun in 2011, but 172 last year.

A strong turn to better times appears to have begun here this past spring.

In April alone, 35 permits for home starts were issued and in May, 26 were issued. Both were the most issued during their respective months since at least 2007, according to data compiled by The Herald-Mail.

The upward trend continued slightly less strongly in June and July, when the numbers of home starts approved were the highest since at least 2009.

Likewise, the market for real estate — including existing houses — began warming up in February, with an almost 3 percent gain over sales in February 2012.

By April and May, total sales were up 35 percent and 69 percent, respectively, over the year-ago month.

But in June — which is the latest month reported by MRIS — the road got bumpy again. Total sales fell 11 percent, compared to total sales in June 2012.

Lessons learned

During 2005’s boom, Home Construction Corp. built and sold as many as 15 houses, Swope said.

Times were sweet.

“I used to have five or six under construction at one time,” he said.

As strong as the market was that year and in the decade’s busy years before it, most of those houses already had buyers.

To ensure growth, the Hagerstown-based company was always building two houses on speculation — taking the risk that by the time the “spec” houses were finished, families would have bought them.

The road-to-ruin lessons taught by the 2007-2009 recession have made some business practices that were common in the past, too much of a risk now.

Swope, 61, president of the county homebuilders association in 1982 and 2003, is among those homebuilding veterans who survived by learning.

He sees his survival and that of the company, as chance.

“I’m lucky,” he said. “We lost a lot of good builders.”

But he also has embraced change.

“In today’s market, I’m not big enough that I can handle carrying more than one (spec) house,” Swope said.

Fronting the expenses of one house “is risky, but it’s not that big of a risk.”

However, Swope said he will never again do two spec houses at once.

“I won’t do that. It’s too risky. The last time, I put two (spec) houses up for sale, they sat there for a while,” he said.

The market had grown weaker, but Swope had already made the decision to build the two spec houses — and, too late, regretted it.

“I wished I hadn’t, but it was too late” to back off on the supply order, personnel and financial commitments, he said.

So, during the recession, Swope had to lay off half his workers. Where he had as many as six skilled workers building houses before the downturn, now he has three.

Comparing his home sales during the recession and its weak aftermath to the spark in the market now is like comparing “zero to four,” Swope said.

Remodeling contracts, not homebuilding, “kept us going” during the downturn, he said.

By comparison, this year has netted not only actual new home sales, but the promise of more.

“I actually just sold my spec house and then, because two people had wanted it at the same time, I sold another house to build from that,” he said. “That’s the one I have under construction and I’m starting another spec house for sale.”

In all, “I will probably sell five homes this year,” he said. “It’s a lot better.”

Different situations

The rise and fall of market prices during the past decade hurt at least one local homebuilding company so badly that it ceased operations last year.

Royal House Construction Inc., which was founded in 1990 and custom-built about 120 houses in all, was crippled badly when the home lots it bought at steep prices before the recession fell enormously in value, co-owner Tim Fields said last week.

The financial pressure that put on Royal House was crushing, Fields said.

After his lender wouldn’t let him lower the lot prices, Fields said he tried but failed to keep up his loan payments, even though the prices were too high to attract the buyers he needed to fund the payments.

Home Construction Corp. and Oliver Homes were able to sidestep that problem because they, unlike Royal House, had purchased enough land long before the price runup, to last them through the economy’s catastrophe and beyond.

Home Construction’s longtime land holdings are concentrated in the Potomac Manor area in Hagerstown’s North End, and Oliver Homes has several lots and raw acreage in this county as well as in Pennyslvania’s Franklin County.

Nonetheless, the economic downturn was hard on both companies.

Like Home Construction, Oliver Homes had to lay off workers, Vogel said. “Probably, early on, it was” a big number of workers, Vogel said, although he doesn’t know exactly how many.

In the past couple of years, the number of employees at Oliver Homes has steadied, staying at about “20-couple,” Vogel said.

The company has “re-employed a lot of past employees that went out on their own” and became independent tradesmen after being laid off, he said.

Now, Oliver contracts with them for specific projects, he said.

Value in a move

Among the people who have bought new houses in Washington County this year are Joe and Kathy Schaefer.

The Baltimore County couple, both 63, began to be sold on Washington County’s rural beauty on visits over the years, but when Joe retired recently, and they decided to move here, the economy was an obstacle.

“We had thought we’d be able to outright sell our home. (But) the place where we lived in Baltimore County was hit really hard” by the sudden loss of value in the housing market, Joe said.

“At the peak in 2007, the house would have sold for $230,000. When we moved, houses like it were selling for $160,000 (to) $165,000. (But) Can’t complain; we paid $35,000” decades ago, he said.

The loss of value cost them some buying power and has resulted in a small mortgage on the three-bedroom, two-bath rancher Home Construction built for them on Dayspring Lane in Hagerstown.

Joe, a civil engineer who retired after 22 years with the U.S. Army Corps of Engineers, said the value the couple has gained is counted in the area’s scenic bicycling trails and agricultural vistas.

“It’s like the land of pleasant living. It’s like you can go out to the farm,” he said. “We like it here.”

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