Homebuilder Blues: Costs Hold Down New Construction Demand
PHOTO/Matt VOLPINI
A new home begins to take shape as part of a housing development in Sutton, The Villas at Pleasant Valley Country Club.
While the homebuilding industry was nursing its wounds during the depths of the Great Recession, several factors were working to create challenges that industry insiders say will likely prevent the Massachusetts market from fully rebounding, even as inventory shrinks and prices rise.
According to The Warren Group of Boston, sales of single-family homes in April were down 1 percent over last year, to 3,504, and 5.9 percent in Worcester County. Inventory was down 27.1 percent over last year, marking the 13th consecutive month of inventory decreases, according to the Massachusetts Association of Realtors.
But The Warren Group reported a year-over-year statewide increase of 14 percent in the median sale price, to $313,000, marking the seventh consecutive month of growth. CEO Timothy Warren Jr. called the three consecutive months of double-digit increases "slightly concerning."
But cost is not just an issue for the existing homes on the market. Guy Webb, executive director of the Builders Association of Central Massachusetts, believes the high costs of both new and existing homes in Massachusetts are keeping would-be buyers on the sidelines, holding back new construction.
"I think, overwhelmingly, the goal (of previous generations) was to own a home. Now, I don't think people think homeownership is such a priority," he said. "I think it's related to some of the generational stuff but it may also be related to affordability. For some people, it's just not an achievable goal, at least not right now. It takes two incomes, generally, to afford to own a home. It gets a little further out of reach I think as time goes by … it's taking more and more of that income to be able to buy a home."
Webb said he doesn't believe demand to buy homes is particularly high right now, but inventory is so low that it makes demand look stronger. However, as demand continues to increase, builders have historically tried to meet it.
But that's becoming harder.
"I think some of the demand isn't necessarily for new housing," Webb said. "New housing generally will cost more than something you can find in the existing home market. It seems to me … a lot of the demand is for a lot of the stuff in the price range that's not going to be new construction and it's driving the median sale price up, but I don't think that's sustainable."
Webb said new home prices are being driven up by the high cost of a dwindling amount of buildable land, the rising price of materials and an expensive and lengthy approval process from local municipalities.
Jim Williamson, who has built single-family homes in MetroWest for more than 14 years, said he grew tired of the fluctuations in that market segment and the increasing difficulties with local regulations. That drove him to push multi-family developments. He's in the process of building more than 130 rental units in Natick and another 174 in Walpole.
"The land is just getting very difficult to find and the towns make the permitting process very, very difficult," he said. "There's now a lot of towns implementing their own bylaws."
For example, he cited one rule that widens the buffer zone between a construction site and wetlands, beyond what the state requires. Other challenges builders noted include longer wait times for percolation — or perc — tests that determine what a soil's absorption rate is at a proposed septic site. Webb said the state requires a 60-minute-per-inch percolation rate, but many municipalities, have cut that rate. For example, Sutton requires a percolation rate of 30 minutes per inch. Webb said such time restraints present challenges for builders, because if water is absorbed between a community's limit and the state's 60 minutes, the land is deemed unbuildable by the town's standards, but not the state's.
"It's not even done with any logic. It makes more land unbuildable," he said. "All that serves to do is sort of artificially choke off the supply of land, which makes what is buildable even more expensive."
Municipal officials have different viewpoints.
Jim Malley, the Title 5 engineer for eight Central Massachusetts communities, including Sutton, said the town felt a 30-minute-per-inch (MPI) rate amounted to "better environmental protection for everybody." He said that rate has been challenged only twice, and in both times, a variance was granted.
Other variations in rules include how far above the water table a septic system must be and how many acres of land are required to be considered buildable. Then there are regulations that require smoke detectors to be hard-wired into a home rather than be battery-operated. In addition, the state is gearing up to implement an updated energy code requiring stricter rules about efficiency that builders say will add costs, and increase a home's energy efficiency by 15 to 20 percent over the 2009 rules that are in place.
Despite the difficulties, homebuilders are seeing improvement this year.
At its pre-recession height, new single-family housing permits approved in Worcester County through April hit 383 in 2007, before dipping to a low of 97 in 2009. So far, 2013 is showing a marked improvement, with 206 permits recorded through April.
"Things are looking great. Things are moving," said Eric Gilmore, president of Gilmore Building Co. of Grafton. "We've got more and more opportunities in front of us and for the first time in several years, we've got people that are asking us about developing land and things for them, which was happening pre-recession, but hasn't happened (again) until this year."
Gilmore believes people are feeling more comfortable with their own finances and are ready to take advantage of interest rates that are still low. And maybe the lack of inventory is pushing those who are able to buy new to do so, in order to find what they want, he added. He expects to see more of that.
"People don't see out there what they want and at some point, I think that the values of existing home stock will rise … to a point where the value that you can get by purchasing (an) existing home … will not be enough to overcome the 'I want a certain style or design.' "
But he said that for the foreseeable future, remodeling, which displaced new-home construction as his company's main business during the recession, will take up most of his work, largely due to cost, he said.
Gilmore said people look at the cost and see that existing housing stock still costs less than new homes.
"Back when things were booming," he said, "there was no difference."
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