Ray Smith, president of Sequoia Building Corp. in Fairfax City, is predicting "one of the best times in the housing industry" for 1982.
That optimism may seem out of step with the unrelieved gloom that has hung over the industry for more than a year, but Smith is not alone.
Virginia homebuilders are like the proverbial groundhog--no matter how cold the winter has been, about this time of year they think about poking out of their holes and looking hopefully for signs of spring.
"February will be the bellwether month," said Robert Johnson, executive vice president of the Northern Virginia Builders Association. "February will be the key. The spring market starts in February, so many of the questions will be answered then."
Those who survived 1981, the area's worst sales year since World War II, can't exactly be described as ecstatic about their prospects for the next few months, but they seem to agree that things can't get any worse.
As a group, homebuilders in the Maryland suburbs, like those in Virginia, are building less than at any time in the past decade. The day of the single-family subdivision built to completion in the certainty that sales would follow has ended--forever, some say.
But they are counting on a pent-up demand, especially among younger and first-time buyers, and at least a temporary drop in interest rates to carry the industry through another difficult year. Like battle-scarred veterans, they say they have learned to survive in a marketplace that has changed dramatically from the traditional builder-buyer relationship.
Homebuilders have learned new ways of doing business. They give up a share of the equity in their units to obtain loans. They limit their inventories to cut their risk. And they offer financing arrangements that were unknown five years ago. The key to success now, they say, is educating buyers to accept the changes in housing finance that have all but eliminated the old-fashioned, fixed-rate mortgage.
"We're not ready to chuck the business by any means," said Robert Mitchell, president of C-I Mitchell & Best of Bethesda. "I think we're out of the woods."
Like most builders in Maryland, Virginia and the District interviewed in the past week, Mitchell said his firm carries a very small inventory of finished houses. Instead, units are completed only as sales contracts are signed on models, which limits the exposure of borrowed capital in a period of high interest rates.
For example, he said, his firm is developing 200 homes in a project called Flint's Grove, off route 28 west of Rockville, with prices beginning at $150,000. "If you went out there today," he said, "you would see four models and about 15 homes under construction. The rest we release for construction only when we get a contract. In more active times we just went ahead and built them." He said five have been sold, even before the official opening scheduled for next month.
"We aren't speculating on hundreds of units," said Rick Sullivan of Porten-Sullivan, a new firm in Rockville that was created just last spring, the worst possible time to be plunging into the housing business. "We build a minimum inventory, then complete on contract. You're still exposed on the cost of land purchase and development, but you don't get stuck with unsold units."
Sullivan builds primarily for the "entry-level" market, town houses and sixplexes with prices ranging from $50,000 to $80,000. With financing from FHA and the Montgomery County Housing Opportunity Commission, he said, he can still give fixed-rate mortgages, which buyers prefer. "With the product that we're building," he said, "we will have a good year in 1982."
If 1982 does turn out to be better than 1981, it is still certain to be far less active than the housing boom years of the 1960s. Optimism appears to be a prerequisite for hombuilders, and the current state of the industry requires all the optimism the builders can muster.
Statistics from Maryland, Virginia and the District provide strong evidence that the nationwide housing slump has hit this area and will continue to have an impact here for some time:
In the depths of the 1974 slowdown, there were 16,000 new units ready for sale in the metropolitan area. Today the figure is about 2,700 units, many of them uncompleted, according to NVBA's Johnson.
Residential construction contracts for November in the District had a value of $5 million for houses and apartments, down 36 percent from the year before, according to the F.W. Dodge Division of McGraw Hill Information Systems.
In the first nine months of 1981, Montgomery County granted permits for construction of 3,376 housing units, 500 fewer than in the same period of 1980. In Prince George's County, construction of detached homes has been particularly hard hit, with permit applications down more than 50 percent from 1980 to 1981.
Total new-home starts for the area in 1982 are expected to be about 15,000, down from 17,800 in 1981 and only 27 percent of the 1965 peak.
In the face of that reality, smaller builders especially have been forced to lay off workers and curtail their operations, though there is little sign that they are giving up the business entirely. Montgomery County officials, for example, say they have received about 15 applications for new residential construction licenses in the past three months and that few of the several hundred builders who currently hold licenses have failed to renew them.
Many marginal builders were driven out of the construction business in the 1974 slump, industry sources say, and those who remain are generally better able to weather prolonged hard times.
Milton Hein, head of the family-owned Milmar Inc. in Oxon Hill, said he built almost 100 homes a year in the mid-1970s, but was down to 25 in 1980 and in 1981 built only 12, four of which remain unsold. He lost more than $150,000 last year, he said, and has laid off about 25 workers, but he is still in business, selling to buyers eligible for VA financing.
Clifton Morris, a small builder in Northern Virginia, said he has plans and sites for about 40 single-family houses but is delaying a start of construction, "waiting to see what's going to happen to interest rates." He built and sold 11 houses last year, he said, which is near his annual average, but he had to "buy down the interest"--assume some financing costs--on four of them to make the affordable for buyers.
Dan O'Leary, president of the District of Columbia Builders Association, whose speciality is rehabilitation of older houses, said his firm finally gave up trying to sell several units and rented them out, much as many condominium developers have had to do. He had little trouble finding tenants, he said, but the fact that people who needs houses are deciding to rent indicates to him that they are going wait a long time before buying.
Even the luxury, upper-brackets market in choice areas of the District, long considered relatively immune to a prolonged slump, has suffered in the recent housing sales depression.
At Foxhall Terrace, at Foxhall and Reservoir roads NW in Georgtown, builder Robert T. Foley is planning to auction off three deluxe homes on Feb. 27. In November, unable to sell either his houses -- which are in the $600,000 bracket -- or his lots, Foley also offered 15 lots at an auction.
"People who want to buy are completely turned off," he said. "The auction process attracted attention, where the normal advertising has not. When buyers see 'auction,' they think 'bargain'," he said, and in fact those who did buy lots at auction got a discount of about 30 percent, he added.
But even Foley is staying in the business and planning to resume construction soon. "There is going to be a tomorrow," he said. "It may not be until 1984, but it will arrive," he said.
Smith said his firm is "doing fine" despite a very slow market. Sequoia is developing 95 town houses on Duke Street, priced at about $100,000, and sold five last month. Like other builders, Sequoia is building units only as sales are made, but Smith said he is continuing to buy land for future development because "we're about to have one of the best times in the housing industry. There are a lot of people between 25 and 35 who are prepared to buy and a pent-up demand is going to have to be satisfied," he said.
Smith offers several types of financing, and has "bought down" the interest rate on some units. He is one of several area builders offering a new financing package called "zero interest," in which the buyer pays off the entire mortgage in five years with no interest.
If a house is priced at $100,000, for example, the buyer puts 30 percent down and takes a five year, no-interest loan for the rest. His payments are $1,166.67 for 60 months, at the end of which he has no more mortgage. The same $70,000 loan borrowed for 30 years at 17 1/2 percent would require mothly payments of $1,026.23. Housing finance experts have cautioned, however, that buyers opting for this form of financing should analyze its tax implications, because they would lose much of the tax advantage of extended interest payments.
Alexandria's Restec Corp. has virtually given up on families and individual buyers and is putting up town houses aimed at sale to investors who will rent them out.
According to a Restec official who asked not to be named, 1982 and 1983 are write-offs" in the conventional housing market. So in late November, Restec began work on a 100-unit town house project in south Alexandria in the expectation that the ratio of investors to owner-occupiers will be about six to one.
Restec is planning another 700-unit development at an adjacent site, also expecting sales to individual and corporate investors who will put them up for rent. A brief sales boom in 1980, the Restec official said, "gave us a false sense of what was happening. We got the impression that there would be a demand for single-family homes. But interest rates shot up, so we had inventory. People had to kick out on their contracts." The firm turned to rentals, he said, and "rental housing is where we see our opportunity in '82 and '83."