Two years ago, when John C. Walker III began planning to build a dozen contemporary-style homes on a wooded cul-de-sac in Potomac, he figured they would be snatched up in no time.

Walker was certain that young professional couples would be lured by the stylish three-bedroom layout and the woodshake roof, the stone patio and acrylic skylights, the choice location and the $160,000 price tag. With interest rates at 10 percent, all he needed was to find a select number of two-income families earning at least $56,700 a year. How could he miss?

But interest rates took off as soon as Walker's crew broke ground, peaking this month at 19 percent. Now, as Walker punches out the figures on his pocket calculator, a couple needs an income of $95,733 to qualify for the same mortgage. This has scared off most potential buyers and left Walker with five unsold houses -- four of them still unfinished -- and a growing degree of uncertainty about the future.

"Whether they'll all be sold by the end of the year, I don't know," the stocky, sober-minded Walker said. "I may just end up renting them because of the high cost of cash. It wasn't feasible for me to stop construction and leave four empty lots. You finish them and you pray."

A short distance up Connecticut Avenue from Walker's Chevy Chase office, William L. Berry takes out a cream-colored graph showing his profits going up almost as quickly as the interest rates that are holding Walker down.

This summer, when 83 percent of builders across the country gloomily reported the level of prospective buyers visiting their developments as "low to very low," Berry said 4,000 people passed through his model houses in five developments in Maryland and Virginia.

While 71 percent of the nation's developers reported their sales as "poor," Berry said, "we've sold 30 homes and grossed over $6 million."

What's his secret?

"There's no secret," the amiable, gray-haired builder said. "We're bucking the trend because I stress the importance of market research, the importance of spotting a void in the market -- and then filling that void."

At a time when interest rates have sent the housing industry into a tailspin, these two builders have tried to cope in very different ways. For one, it is a time to hunker down, to live off the fruit of past labors while waiting for the climate to improve. For the other, it is a time to move aggressively, to exploit fully the small, well-heeled market he has so painstakingly carved out for himself.

For all his mounting problems, John Walker has weathered the financial storm better than many builders, largely by drawing on a cash reserve from a lucrative town house project he finished last year. But he is still struggling to close the book on Birnam Wood, his small development near Cabin John Mall.

Walker swings around from his desk and pulls out his calculator again. At 12 percent, a $100,000 mortgage at his subdivision would cost someone $1,028 a month. At 19 percent, the monthly bill jumps to $1,588.

Since most of his potential customers are well below the $95,000 income bracket, Walker got on the phone and persuaded his bank to provide loans at 15 1/4 percent, well below the market rate. "What are their options -- to foreclose on me?" Walker asked. "Then they've got to sell the houses themselves."

Now Walker has arranged to "buy down" that interest rate -- in effect, to attract buyers by subsidizing their monthly payments -- to a more affordable 12-7/8 percent. That means he has to pay what now amounts to $988 a month per house to bridge the gap between the buyer's payments and the market rate.

"Very few builders can afford to do this," he said. "I won't make any money -- I just won't go under. The only question is how long before my surplus runs out."

There are some pitfalls to this buy-down scheme, for unlike the standard 30-year mortgage, the buy-down loan lasts for only five years. "It's like honey on flypaper," he acknowledged. "The bank gets you to qualify for the loan, but it comes due in five years and the buyer has to refinance. We're all gambling that the rates will come down. If the rates are still high then, look out."

The 53-year-old builder has made some other unorthodox deals more reminiscent of a used-car salesman. In one case, he is taking a customer's current home as a trade-in and plans to rent it out until the sales market recovers.

Pasted across the wall of Walker's small office are the blueprints of successful subdivisions, reminders of a time when financing was easy and profits were abundant. It is a difficult period for Walker, a fourth-generation Washington builder who is already grooming his son to take over the company that bears the family name.

He recently had to lay off two longtime employes, one of whom has been with him for 12 years. After reaching $3.3 million in sales in 1978, he'll be lucky to top the million-dollar mark this year. And he doesn't expect to build many new houses on speculation. These days, he said, most small builders will only start new homes that have been presold.

"The only thing we'll be doing next year is selling what's left over this year," Walker said with a frown.

While others trim their sales, Bill Berry, former Air Force pilot, oil wildcatter, now housing developer, says he has found a way to prosper.

"In this market, and it is the worst possible market, the worst I've ever seen, we're actually growing," he said. Then, holding up his right hand and ticking off the indicators of that growth, he went on:

"We've hired three new middle-management people. We're expanding our office space. Last Wednesday, we had our annual employe dinner and declared over $59,000 in profit sharing, compared to $36,668 in fiscal '80."

The basic ingredients of Berry's victory in this summer of housing drought appear to be so simple as to warrant a place in any primer for developers. They are: Do your market research. Learn what kinds of housing and what price ranges are missing in the local marketplace. Build the desired houses at the desired prices. And then, add the only mysterious element -- excitement.


"That's right," Berry said. "We learned that even in such a bad market, if you have an exciting house you could excite people enough to convince them to buy it and to sell their present house, with all the problems that means today."

Berry's premier example of excitement in housing is Canterberry , the "equestrian community" he is building in Fairfax County. When he bought the 100-acre property near Burke Lake Park last December, he said, "It had 41 lots. But, instead of putting up a normal subdivision, we decided to build an equestrian project. Our market research showed that there were none in the Fairfax area.

"We felt that there were people with money who wanted to live in that kind of community, yet couldn't afford the million-dollar estates. Our houses are big and sell under $200,000." (Actually, they range from $175,000 to $241,600.)

"We could have cut the land up into more than 41 lots, but we astounded people in the business by going against high density in a time of a bad market. We decided that a third of the lots would be two acres and the rest between one and two acres."

The horsiness is achieved by a network of bridle paths, which Berry has installed, and by telling buyers that they have enough land to build their own stables and enough common ground for a jumping ring. The rest is up to them.

Berry's second project, which likewise seems to go against the grain, is McLean Estates. Opening a looseleaf binder of computer printouts and maps, his index finger settled on a map specked with yellow spots. "We plotted all the projects in the McLean area over $250,000 and we found all these. Then we plotted those under $250,000 and what did we find?" His pointing finger ran over the map on the next page. "None."

There it was -- the void in the market.

Berry moved quickly. As with his other projects, Berry put up several model homes and built others only as the orders came in. But while McLean Estates consists of pretty much the same houses he has built at Canterberry, anyone who understands why "McLean" should take precedence in an address must be willing to pay for it. The prices range from $206,100 to $254,900.

Again, Berry knew his market. A computer profile of the first 10 buyers at McLean Estates shows that 80 percent have incomes over $85,000; 50 percent have two incomes; 40 percent are under 34 years old; 80 percent have children; almost all already own a house.

While other builders are scrimping on the style in which they furnish their model homes, Berry spent lavishly. While others are pinching advertising pennies, Berry was buying full pages.

"I know all that sounds like a lot of baloney," he said, "but the fact is that's how we operate. And it works."

Throughout the Washington area, dozens of other developers are scrambling to find out what works in a depressed market. Although the average price of a new house in the area has inched up to $117,092, the high cost of financing has prompted more and more people to think small.

The result: 40 percent of all sales in the first half of this year were for under $90,000, and 59 percent were under $100,000, according to Housing Data Reports, a local market research company.

Renay Regardie, the firm's president, said first-time buyers are still grabbing up efficiency and one-bedroom condominiums. But she said the market for some of the costlier, two-bedroom condominiums in D.C. "is in danger of crippling itself, a victim of lousy product, hype, greed, overestimation, inflated interest rates and this year's crummy real estate market."

Singles, young women and professional couples are still clamoring to break into the market, Regardie said, and a growing number are turning to attached town houses, which are now dominating the suburban market for the first time.

"Town houses were once looked at as your first buy on the way to single-family heaven," she said. "But they are smaller and about $20,000 cheaper than single-family homes, and when the husband and wife are both working, they might want to come home to a town house with a common pool and tennis courts and not have to worry about mowing the lawn."

At the same time, high interest rates have blocked most area homeowners from moving into bigger houses. Lisa and John Thompson have waited a long time to sell their Montgomery Village town house in order to "trade up" to a larger residence closer to the city -- only to find that they can't sell their home.

"We don't feel under great pressure to move," said John Thompson, 27, who is tired of the 45-minute commute to his advertising agency. "But we feel we ought to buy because rates are just going up like crazy. And even if the rates drop, then prices will go crazy."

"Things are so reversed now that to own a house is a liability," said Steven M. Cohn, a real estate agent who was showing the Thompsons a $119,000 town house in Rockville last weekend. "Trading up is just about impossible because it's so hard to sell your house."

Cohn said his agency no longer accepts contracts that are contingent upon buyers first selling their own homes. "In the last couple of months we've had eight or nine contingency contracts, and not one has gone through," he said.

Things are even more difficult for first-time buyers like Rick Hubbard, 24, and his wife Lori, who have been married little more than a year. They are tired of paying rent for their cramped Alexandria apartment and are thinking about starting a family, but they can't afford a mortgage at more than 14 percent interest.

"We were kind of naive at first," Lori Hubbard said as they walked through the living room of yet another model home in Fairfax. "Now we're getting a rude awakening. The more we look, the more we're thinking we'll just have to sit around the apartment for awhile. We've saved a lot of money and it scares us to think we wouldn't have anything left over."

The salesmen at many suburban subdivisions are among the loneliest people in town these days. Many spend hours watching television and waiting for a few customers to trickle in.

At Burke Cove, one of a row of new Fairfax County developments with prices starting at $59,200, the number of weekend visitors this summer began to dwindle from 70 to about 30. Last Saturday and Sunday, only 12 people stopped by.

"Our sales are nowhere near what they used to be," said sales manager Judy Heilig. "A lot of people walk in and don't even ask the purchase price, they just say, 'What's your interest rate?' "

Gordon Smith of Miller and Smith, a McLean development company with houses priced from $64,000 to $105,000, said the number of visitors to his five area projects is at a 10-year low. The lowest-priced condominiums are selling best, he said, "but even 'best' is bad these days. People who'd normally buy an $80,000 town house are settling for a $60,000 condo."

Even luxury housing is feeling the pinch. Last fall, when developers for the Lee National Corp. finished the last section of their Chatsworth project in Northwest Washington, they found to their chagrin that the brick town houses, priced up to $319,000, were not selling. They took the homes off the market for awhile, then launched another sales drive. From April 1 to Sept. 1, they didn't sell a single home.

Finally, the developers agreed to offer their own financing at 12 3/4 percent on five- and 10-year loans, and this month they managed to sell a few houses. Even at those rates, however, someone who buys the $319,000 four-bedroom model must put down at least 25 percent -- or $80,375 -- and make payments of $3,033 a month.

If his firm had not been able to offer the cut-rate financing, said marketing director John Engel, "I'd invite your photographer to Key Bridge to watch me jump off in chains."

Clearly, while some have found ways to survive and even prosper, many area builders are increasingly pessimistic about the future.

"The current problem is far greater than the public realizes," Walker said. "Foreclosures and bankruptcy among builders would be rampant if it weren't for the fact that the bankers are in as much trouble as we are and are reluctant to blow the whistle. Builders are going to be dropping like flies in a very short period of time."