Glutted market, wary buyers hit region's homebuilders hard

VIRGINIA BEACH

Two years ago, Gary Caruana built more than 40 homes in the region. This year, he says, he'll be lucky to get four or five built.

Buyers are wary of buying new homes.

"It takes appointment after appointment after appointment to get them under contract," said Caruana, head of Virginia Beach-based Caruana Homes Inc. and GTC Homes.

And banks are wary of lending to builders.

"It's not a line of business that we're coveting in this environment," said Ben Berry, president and chief executive officer of Gateway Bank & Trust Co., whose parent company is based in Virginia Beach.

The supply of homes for sale continues to mount as jittery buyers nervously watch the economy, the weak housing market, and increasing energy and food prices. Weak consumer demand and concerns about builders' financial health have prompted bankers to tighten lending requirements for homebuilders, making it harder for them to borrow for new lots and construction.

The effects of slack demand and tighter credit have shown up in the subdued pace of building. During the January-through-March quarter, builders took out $190 million of single-family building permits in Hampton Roads - a 27 percent decline from the first quarter of 2007, according to Old Dominion University's Economic Forecasting Project. Second-quarter data is not yet available.

These days, Berry and other bankers want to know much more about the status of a builder's projects, including its inventory of unsold homes and marketing efforts, before extending credit.

"We're continuing to work with our existing customers," Berry said, "but we're not seeking any new relationships" with homebuilders.

The slowdown is apparent in the number of homes being built for Homearama 2008, the Tidewater Builders Association annual showcase. The October show will feature only seven homes in the Ashville Park development in Virginia Beach, down from 17 at last year's show in Chesapeake's Edinburgh Meadows.

Ashville Park is being developed by L.M. Sandler & Sons. The Virginia Beach-based company, which has projects throughout the Southeast and mid-Atlantic regions, has suspended or slowed work on several projects, including some in Hampton Roads.

Ed Sadler, president of the Tidewater Builders Association, acknowledged Thursday that the cost and availability of financing are major concerns for many of the organization's members.

Still, "if a project or a home makes sense, there are lenders available," said Sadler, president of Sadler Building Corp. in Virginia Beach.

Sadler said he expects his company to build 28 to 30 homes this year, an increase of three to five from last year. That's because the company is building some less costly homes, diversifying its mix, he said.

In Hampton Roads, the inventory of unsold homes is less bloated than in severely troubled markets such as California, Nevada and South Florida, Sadler said, because "we did not have the large national developers who put up hundreds and thousands of homes" at the same time.

Still, Hampton Roads did experience a burst of homebuilding activity earlier in the decade, when the combination of low interest rates, government policies encouraging home ownership, and an abundance of mortgage financing fueled a surge of residential construction.

Some of the financial pressure on Hampton Roads' builders springs from those frenzied conditions. Fearful they would run out of lots on which to build, some builders say now that they overpaid for properties that developers made available.

For example, Caruana said he bought 10 lots in the Great Bridge area of Chesapeake in late 2005 for $315,000 apiece despite misgivings about the cost. Several are still vacant, he said, and their values have plunged.

William Brice, president of WATAB Construction Corp. in Norfolk, recalled having the same problem. Some developers, he said, required that builders buy a minimum number of lots, which required taking on additional debt.

"They had us over a barrel, but you had to take it," Brice said.

Some of the region's builders hold out hope that the Housing and Economic Recovery Act that President Bush signed into law Wednesday will spur homebuilding by fostering confidence among consumers.

In addition to supporting Fannie Mae and Freddie Mac, the giant government-sponsored companies that buy or insure many of the nation's home loans, the mortgage-rescue package provides a tax credit of $7,500 or 10 percent of the purchase price, whichever is less, for first-time homebuyers.

The legislation "will send a message to the consumer who isn't in the homebuying market that a home is still a safe, valid, long-term investment," Sadler predicted.

Meanwhile, Caruana and other veteran builders are resorting to the financial reserves that they accumulated during the recent boom to muddle through the slowdown.

"Builders had a good, strong four or five years," and some put money aside rather than buying new boats and autos, Caruana said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com