MARK LEFF
‘Very difficult times’
Permitting for new-home construction in Massachusetts has tumbled in 2007 as builder confidence sank this month to its lowest level in 16 years.
A total of 5,086 building permits were issued in the Bay State through April of this year, a 34 percent drop from a year ago. The decline comes as builders struggling to sell off homes are slashing prices and offering various promotions.
Just last weekend, national builder Pulte Homes offered as much as a 10 percent discount on select homes in the company’s Boston-area communities. As part of another promotion, a local builder is offering free cars to anyone who buys a condominium in his development.
“There’s no question that these are very difficult times in the real estate industry. What I would point out is that there are differences between what’s happening nationally and what’s happening locally,” said Mark Leff, a banker who will be installed as president of the Home Builders Association of Massachusetts on Tuesday.
While builders in other parts of the country are dealing with sales contract cancellations, local homebuilders aren’t seeing that as much because the state hasn’t had the type of overbuilding seen in other states, according to Leff.
Economists say the industry’s problems have been compounded by a glut of unsold homes caused by overbuilding in many parts of the country, including Florida, Arizona and California. But frenzied building hasn’t happened in Massachusetts.
“There’s not a big oversupply of anything in Massachusetts that I know of,” said Kevin Sweeney of Sweeney & Sons in Maynard.
In fact, permitting for new-home construction in Massachusetts trails most states in the country. While 2,571 single-family home permits were issued in Massachusetts through April of this year, states with similar populations, like Washington, Arizona, Indiana and Tennessee, issued thousands more, according to statistics from the U.S. Census Bureau.
Arizona issued 15,999 single-family home permits from January through April, while Tennessee had 11,185, Washington 10,680 and Indiana 6,398.
“The fact of the matter remains that our portion of new housing stock as a percentage of total inventory is smaller than it is on a national basis,” said Leff, senior vice president of Salem Five.
Meanwhile, concerns over tighter lending standards and a rise in mortgage rates are dampening builders’ outlook and could stall a recovery, according to the National Association of Home Builders. The NAHB/Wells Fargo Housing Market Index, which gauges builders’ perceptions and future expectations for home sales, fell to 28 in June, the lowest reading since February 1991.
Lenders have begun tightening their lending practices as foreclosures and delinquency rates have climbed. Some of the foreclosure activity and changes in practices are tied to subprime loans. A recent survey of senior loan officers by the Federal Reserve indicates that roughly 16 percent tightened credit standards in the first quarter of 2007.
‘A Negative Effect’
Smaller homebuilders in Massachusetts, particularly those who construct higher-end homes, say stricter lending practices and the increase in mortgage rates hasn’t had a huge impact on business because buyers of their homes are more financially secure and won’t have trouble obtaining loans. The average 30-year fixed-mortgage rate climbed to a 10-month high of 6.84 percent last week, according to Bankrate.com.
“I think the types of [new] homes being sold here tend to be more upscale so they’re not as directly affected by the subprime market. But that’s certainly had a negative effect on the confidence of buyers,” Leff said. “The bigger problem in this state is the fact that folks are having trouble selling their existing home. That stagnant inventory of existing homes has had a negative effect on sales of age-restricted projects and upscale projects.”
Some acknowledge that their business ultimately could be affected because a rise in rates, coupled with the recent drop in property values and restrictive lending standards, reduces buyers’ purchasing power and shrinks the overall buyer pool.
Prospective buyers of newly constructed homes who are trying to sell their current homes, for example, might run into roadblocks because they can’t find a qualified buyer.
“I’m not going to see it directly but I could see it indirectly from [buyers] who have to sell lower-priced houses,” said Scott Colwell, who builds luxury homes with starting prices of $900,000 in towns like Medfield, Norfolk and Wrentham.
Colwell, owner of Hoover Realty Trust, said he’s encountered people who would like to purchase one of his homes but fear they won’t be able to sell their current one.
The sluggish market has spurred builders to discount home prices and offer a variety of amenities to entice buyers. Leff said builders are refocusing marketing strategies, adjusting prices, retooling the sales process and even changing the design of homes to make them more sellable.
The developer of a community in Milford called Zain Ridge, which will include 70 detached condos when it’s completed, purchased 10 Toyota Camrys to give to the next 10 buyers for free. Asking prices start at $339,000 and go up to $450,000. Five homes already have been sold, according to John Silva, broker-owner of Century 21 The Real Estate Group.
Douglas Rosenau, senior vice president of Natick-based Middlesex Savings Bank, said that developer’s action is one of the most unique promotions he’s seen.
Other builders are offering free upgrades for countertops or flooring or other types of incentives, according to Rosenau. “Many builders are offering some amenities to the product that they’re building,” he said.
Pulte Homes, which has subdivisions in Acton, Danvers, Upton, Hanson and several other Massachusetts towns, advertised a national weekend sales event last week that offered homebuyers as much as a 10 percent discount on select homes and an additional $10,000 off for buyers who presented a newspaper ad. The Michigan-based builder has reported losses and weakness in prices this year, along with some of the nation’s other major builders.
Builders who have more homes to build in a subdivision often prefer to provide upgrades or other freebies over price reductions. Sweeney said that’s because appraisals are based on prior sales prices and market conditions can improve once other homes are built.
But such giveaways, mortgage rates and lending practices aren’t what’s going to attract buyers, according to Sweeney. He thinks the biggest deterrent for buyers, particularly those relocating, is the state’s high cost of living. High home prices, taxes and heating costs during the winter are driving people away, he added.
