The Washington area real estate market has fared far better than markets elsewhere in the country, mainly because of the region’s strong and steadily growing job base. But the environment is still a tough one for builders, industry experts say, so developers are holding back somewhat on new construction and are offering incentives to entice picky buyers.
Only half as many building permits were issued in 2009 in Maryland as were issued three years ago at the height of the real estate boom, said Tom Farasy, president of the Maryland State Builders Association.
“Last year was awful,” Farasy said, “so even though we’re doing about 5 percent better this year, it’s still awful.”
A lot of builders were caught in the middle of projects when the market went south, said Farasy, and while many still are in development, they have been deferred. Those expected to have been built by now may only be in the early phases of development.
Farasy says one problem builders have is a regulation that says no more than 50 percent of units in any one development can be financed through FHA loans, which offer an attractive down payment of as little as 3.5 percent.
Fewer buyers are qualifying for conventional mortgage loans, which typically require at least a 10 percent down payment. So a developer with half of his units sold under FHA financing has a difficult time moving the rest of the properties. The expiration of the first-time homebuyer federal tax credit did not help.
Developers also are struggling to get financing for spec homes, which means they cannot draw in buyers — most of whom are looking for already built properties and are unwilling to take the risk of buying a lot and building in the present economy.
Farasy says national builders are experiencing recovery, however. Toll Brothers, for example, has 22 new-home communities currently selling homes and lots in the metro area and is about to open another, Shady Grove Crossing, in central Montgomery County.
Housing developments doing the best right now are those that offer easy access to the Metro system or to major interstate corridors close to the District.
“Unfortunately, the small local builders and developers are losing market share because they don’t have the same financial resources as the national building companies,” Farasy said.
But even big builders like Toll Brothers are not moving ahead as quickly and have delayed projects pending a market recovery.
“There’s a tremendous amount of caution,” says John Heithaus, chief marketing officer for Metropolitan Regional Information Systems. Developers’ trepidation may be good for buyers, however.
Heithaus says some of the most popular new housing incentives for buyers include:
» Builders willing to cover closing costs;
» Developer paying a buyer’s mortgage points;
» Upgrades such as a home theater or extra bedrooms at wholesale or cost;
» Developers covering moving expenses.
“Everyone is expecting a deal now,” Farasy said. “It doesn’t matter how unique the property is. It won’t sell without incentives.”
“Of course, the best incentive is a great price,” Heithaus said, while cautioning against being drawn in by all the incentives. He said it is important to think about a property’s value over the long haul.
“Where is the lot located? Is it unique? Is it on the water? If the development is brand new, bring some long-term perspective to the purchase,” he advised.
Farasy said he was glad for the influx of military jobs with Base Realignment and Closure in the next 12 to 18 months but did not expect it to have much effect in terms of spurring housing development projects.
“With all the constraints on builders right now, they just can’t meet the market,” he explained, “and many of these new residents will move to other jurisdictions.”
Since 2006, Maryland alone has shed more than 20 percent of its building industry employment. That not only points to home starts being down but also to a lot of trades people being out of work.
Despite the bad news overall, however, there are some projects moving forward. Most of those are in counties close to the District, including Fairfax, Arlington, Loudoun, Prince William, Montgomery and Prince George’s. Heithaus said the Dulles area also is active right now for new developments.
