If interest rates go up, alternative investments become more attractive. But homeowners do not react to changes in interest rates — or house prices — like stock traders. The so-called transaction costs of selling a house and moving to another — agents’ fees, legal fees, taxes, moving expenses — are high. Moreover, housing prices are what economists call “sticky.” Sellers are loath to lower prices when demand slows; they stubbornly hang on. They will often take a house off the market and wait for a more propitious opportunity rather than accept less than what they have come to believe their home is worth. In any case, they have to live somewhere. Which is another reason that Linneman doesn’t agree that the present housing market is a replay of the 1999 technology bubble. “Homes are fundamentally different than dot-com stocks, since they generate a housing service flow. That is, we live in them. Whereas the absence of cash flow meant that, when the gloss was gone from dot-coms, there was nothing to hold up share prices. Even if the gloss disappears from housing, the service flow of living in one’s house will support housing prices over the long term.”
Housing bubble or not, in early 2006 there are signs that the gloss is starting at least to tarnish. The current thirty-year mortgage rate is slightly more than 6 percent and rising, compared with slightly less than 6 percent a year ago. Demand for new houses is weakening. Single-family house construction for the month is a couple of percentage points lower than a year ago, while the issuance of building permits for houses, an indicator of future construction activity, is down 5 percent.6 According to a front-page article in The New York Times in October 2005, “The question remains whether all of this represents a momentary cooling off of some overheated housing markets, or it presages a more pronounced downturn that would end a decade-long boom.”7 Toll Brothers has announced that it expects to sell fewer houses over the next year than it had earlier predicted. “It appears that we may be entering a period of more moderate home-price increases, more typical of the past decade than the past two years,” Joe Duckworth’s old boss, Robert I. Toll, is reported as saying.8 So, whether or not there is a bubble, New Daleville is seeing the light of day under what may be less than ideal circumstances.
At the Arcadia Land Company, there is no sign of a downturn, quite the opposite. Jason Duckworth has just rented the entire second floor of the old bank building in Wayne to accommodate a staff that now numbers ten people, including an engineer and another Wharton grad. The extra people are needed to manage a growing roster of projects. Woodmont, which is Arcadia’s first TND, is well under way. The zoning change for the neotraditional neighborhood in Sadsbury has been slower, despite the bus trip to Kentlands, but recently that project, too, received final approval, and it is moving ahead.* As for Joe Duckworth, he’s already immersed in his next deal, and it’s a big one. He shows me the plans for a new community called Bryn Eyre. The old industrial site, which once belonged to Bethlehem Steel, covers 3,500 acres, or five and a half square miles. Arcadia is one of several partners, but is taking a leading operational role. The project has the support of the local borough, the county, and the state, and the permitting process is going smoothly. Construction is slated to begin in two years. “This will be a real town. We’ll have twelve thousand homes, four schools, and two downtown areas,” Duckworth tells me excitedly. “It’ll be the biggest residential development in Pennsylvania since Levittown.”
Duckworth wants to talk about Bryn Eyre, but I steer him back to New Daleville. Does he have any concerns about a possible downturn in the housing market? “I feel solid about the situation,” he says. “Job growth is good, and there’s still a limited supply of permitted land in Chester County. Even if the mortgage rate goes up to seven percent, that’s still a good rate. Of course, if it hits ten percent, then we have a real problem.” Duckworth knows what he’s talking about. “I went through two periods when interest rates went up,” he says. “One was in 1990–91, which wasn’t too bad. The other was in 1980–81, which was awful. Mortgage rates went to fourteen percent. In our region, demand dropped by half!” Market corrections occur regularly in the development business. I ask Duckworth how a builder copes with a severe downturn. “If you haven’t sold any houses in a project, it’s easy, you simply chop prices. But if you’re caught in the middle of a project when the market stalls, it’s different. You can’t just reduce prices, since this really upsets the people who have just bought a house from you. If they see their property values dropping, they come to you and complain, and they bad-mouth the project to potential customers. So what you do is what I call increasing the value proposition for the buyer. You don’t change the price, but you offer more. You make previous options standard. If there’s a kitchen upgrade, or a bonus room, you make it part of the package. If window dressing isn’t enough, you effectively reduce the price by subsidizing the mortgage, or by offering a mortgage-free period, say six months, as an incentive.”
What happens if the downturn continues, I ask him. “Then you have to try something else. If you’re offering models A, B, and C, you add a model D, which you do price lower. But it’s not the same house, so the previous buyers don’t mind. The new house can’t look crummy, though, since that would be perceived as lowering property values. You can build a smaller house, for example, but the same width as the larger models, so it looks similar from the street. You can also have fewer features inside the house, or less expensive trim. If things get really bad, you can offer incentives, and even negotiate lower prices. The advertised price stays the same, but you sit down with the prospective buyer and basically say, ‘What would it take to close this deal?’”
Earlier, when I spoke to Carmela Bond, Ryan’s sales manager, she told me that in the three months since the sales trailers opened, the number of visitors to New Daleville has been very small, although she assured me that Ryan considers it a pioneering project and is willing to be patient. Should they be worried, I ask Duckworth. “Well, the first lesson is that it’s hard to sell anything out of a trailer, especially a new idea like traditional neighborhood development. You have to get the models up so that people can experience the whole package. I’m convinced that trailers are a waste of time.” He says that he and Jason have discussed this, and they now realize they made a mistake in their dealings with the builders. “I assumed that they knew what they were doing, so although I made suggestions, I tended to defer to their judgment. I was wrong. I may not have built any TNDs, and I may know less than the corporate head office, but I’ve visited a lot of projects around the country, and I do know more than the division heads who are running these projects. They tend to think that TNDs simply require a different kind of ordinary house, and they want the execution to be like a conventional project. Next time, we’re going to require builders to complete the model homes before they begin selling. You have to show people what the street will be like, and what it means to have compact lots.”
Duckworth also thinks that Ryan may have set its house prices too high. “I would have expected the starting price to be belowthree hundred thousand dollars. Instead they advertised the project as starting in the upper three forties. They recently reduced it to the three tens, but in my opinion that’s still too high.” He expects sales to remain flat for the moment. “We’re now into December, and nobody buys a house in December or early January. But the six weeks between mid-January and the end of February are a hot period. By then, they’ll have the models up, and that’ll be the real test. I expect them to each sell a house a week.”
What happens in the case of a major downturn? “NVR has a relatively small deposit, so they could walk away,” he says. “At that point, you don’t deny reality. We would probably have to renegotiate the price of the lots. I might offer a lower price, until things pick up, after which they would have to give me a larger share. I’m pretty confident that NVR will negotiate in good faith. I now control thousands of lots at Bryn Eyre; builders are anxious to keep on my good side. Rick King has already talked about taking three hundred lots a ye
ar from us. So they’ll be patient at New Daleville.”
*Not without incident; during the supervisors’ final vote, the township building had to be evacuated because of a bomb threat.
25
Bumps in the Road
In March of 2006, the Financial Times reports that sales of new homes in the United States have dropped further, and the stock of unsold homes has hit the highest level in ten years. Not the bursting bubble that so many have been predicting, but definitely a slowdown.
Early in the new year, to encourage sales, Ryan further reduces house prices at New Daleville, lowering the starting price to $290,000. As an additional incentive, buyers who finance their homes through NVR’s in-house mortgage company are offered a free finished basement, or the equivalent in other options. Mike Linthicum juggles Ryan’s lineup, removing the expensive Carroll and adding two midrange models, called the Fitzgerald and the Austin. “We are monitoring and adjusting as necessary,” the sales manager, Carmela Bond, tells me. She sounds hopeful but raps her knuckles on the desktop. Touch wood.
By the end of February, just as the first model homes at New Daleville are being finished, there are more signs that the previously strong national economy is faltering: interest and inflation rates edge up, and consumer expectations dip. The Conference Board, a business group, reports that national sales of new homes have fallen 5 percent in January, the sharpest drop in two years, and that the inventory of unsold units is up a third from the previous year.1 For the reasons that Joe Duckworth explained, house prices have not fallen dramatically, but it appears a change is in the air. “It’s pretty unambiguous that demand for housing has been weakening in the last couple of months,” an economist at UBS, a global financial firm, tells The New York Times.2 This glum view seems warranted when, less than a month later, the Financial Times reports that sales of new homes in the United States have dropped further, and the stock of unsold homes has hit the highest level in ten years.3 Not the bursting bubble that so many have been predicting, but definitely a slowdown.
Duckworth’s sanguine forecast that sales at New Daleville would pick up in mid-January proves overly optimistic. In the six months since the sales trailers opened, NV has sold seven houses and Ryan only two. There has been no discernible pattern to the buyers so far. Ryan’s sales representative, Kristi Oliveira, says that of the two homes sold, one is the least-expensive Sheldon, bought by a young family, and the other is a top-of-the-line model with all the extras, bought by an older couple. NV’s first three buyers have been a single-mother nurse with a seven-year-old, a schoolteacher with grown children, and a middle-aged couple who are moving from an NV development in Virginia. “I’ve tried to make a profile of our buyers,” says Karl Woodeschick, who is Oliveira’s counterpart at NV. “There are empty nesters, young families moving up, and first-time buyers. I just gave up.” He is referring to what economists call market segmentation — or, rather, its lack. One of the problems at New Daleville has been identifying potential buyers. Are they young families or so-called active adults? Are they willing to spend more for living in a neotraditional community — as TND advocates generally claim — or are they value-conscious and expecting to pay less? Without a definite profile, it’s hard for the builders to target their marketing.
Oliveira remains upbeat. “The traffic at the site picked up in February,” she says. “People like the concept, and they really like the houses. They think they’re cute.” Woodeschick is less sanguine. “There’s a lot for buyers to think about,” he says. “They have to buy into the location, the small lots, and the community association. It’s a big commitment, and it usually takes them several visits to make up their minds. The problem is that it’s too easy to just go home and say forget it.” Both sales reps agree that there is very little overlap between visitors. Most people seem confused about whether there is one builder or two. “That’s the first question they ask us,” Woodeschick says. “Other than ‘What are you guys doing way out here?’”
In real estate terms, Londonderry is the frontier. Prospective home buyers usually comparison-shop and visit several developments at once, but most of the new subdivisions in this part of Chester County are several miles from New Daleville. Only a fifteen-minute drive, but it could be another planet. It looks like Hovnanian’s Brad Haber was right; it’s not easy to sell houses on small lots in the middle of nowhere.
The April monthly meeting of the builders and the developer takes place in the Ryan sales trailer. Jason Duckworth and Jim Weidner attend, as well as staff from NV and Ryan. Although the chief activity on the site now is house construction, there are many outstanding improvements that are the responsibility of the developer. Weidner goes down a long checklist. He says that tree planting along the boulevard is progressing, and that bids are coming in for the “public amenities,” referring to stone piers at the entrances, two arbors, a gazebo, and a windmill at the head of the boulevard, to create a rustic effect. Jason hasn’t found an old mill and has had to settle for building a new one. There is a long discussion about the children’s play lot. Arcadia suggests moving it to a more prominent location, in the wide median of the boulevard, but the builders object. Many of the buyers don’t have children, they say, and won’t see it as a plus. It is agreed that the play lot will be built in a more discreet location.
Weidner says streetlights have been ordered and will be up soon. The builders ask if they could be installed later, since on the narrow streets the extra-wide loads of the lumber trucks may knock them over. Weidner explains that the posts carry the street signs, which the township requires to be in place when the houses are occupied. “Your guys will just have to be careful,” he says. Another signage issue concerns a warning to homeowners about the drip irrigation field. It appears that the lots abutting the field will each require a small sign. Jason is worried that their number will be excessive. “They’ll be nice signs, and they’ll say something nice,” says Weidner.
Residential subdivisions are sometimes described as “springing up overnight.” Hardly. It has taken New Daleville almost four years to get this far, and now, despite Arcadia’s commitment and NVR’s efficient organization, the messy business of preparing the site and building houses requires close attention to scores of small details. The contractors’ pickups and vans parked on the narrow streets are in the way of NVR’s bulky lumber trucks, which dump their loads of panels and wood trusses on the sides of the streets. Heavy cement trucks, pouring foundations and basements, create more congestion. This is especially a problem on the boulevard, which is where visitors to the model homes park. It’s decided that signs are needed to divert construction vehicles onto a side street. It is also agreed that the builders can use two of the unsold lots to create temporary parking for visitors.
The discussion goes on for more than an hour. It is remarkably even-tempered, considering that the September deadline came and went more than six months ago and there is still no running water on the site. “There’s a lot of tolerance on both sides,” says Jason. “The builders have been understanding about the delays. On our side, even if the sales contract were in force, we would never oblige a builder to take lots without buyers. We all know that there are going to be bumps in the road.”
Weidner reports that the water line has finally reached Daleville and that Chester Water is currently chlorinating and testing the system. He assures the builders they will have running water soon. This is a key concern, since the first four home buyers are slated to move into their houses in two months. Weidner explains that because of the length of the trunk line, to maintain pressure, Chester Water has had to build an intermediate pumping station. Construction of this booster pump is expected to take six months; in the meantime, the water company will install a temporary pump. Unfortunately, the resulting water pressure will not be sufficient for the fire hydrants to be effective. Weidner tells the builders that, as a temporary fire protection measure, Arcadia is proposing to the township to park a water tanker on one of the un
built streets. “Hopefully out of sight,” someone remarks.
A few weeks later it becomes obvious that the estimates were too optimistic; the water system will not be operational for another month. And another complication has arisen. Londonderry’s fire chief doesn’t like the water tanker. He is worried that completion of the booster pump might be delayed into the winter, which means that water in an exposed tank would freeze. Weidner proposes an alternative: to prevent the water from freezing, Arcadia will bury a ten-thousand-gallon emergency tank in the boulevard median strip.
When the township granted final approval of the development plan for New Daleville, among eleven specific conditions was the requirement that there be a working fire hydrant within six hundred feet of any occupied building. Although there are no hydrants in any of the other subdivisions in Londonderry, the houses at New Daleville are closer together and represent a greater hazard. Technically, Arcadia is in violation of this clause, and the township could postpone the occupancy permits until the fire hydrants are operational. Occupancy permits, issued by the township building inspector, declare the houses to be legally completed. Without them, houses cannot be occupied, mortgage companies will not release funds, and builders cannot reach final settlement with buyers. Weidner believes that the township will approve the buried tank, since the fire department routinely pumps water from so-called fire ponds. I ask him if he thinks the water tank is the final hurdle for New Daleville. “God, I hope so,” he says.
All these delays affect Arcadia, too. The contract calls for each builder to buy, or “take down,” a minimum of four lots per quarter. However, until there is running water in the houses, not only are the builders under no obligation to buy a minimum number of lots but the annual escalation clause also does not apply. In effect, the builders are getting what Duckworth calls “a free ride.” As usual, he is philosophical. “Dave Della Porta and Jason underestimated the problems we would have with Chester Water,” he says. “Something unexpected always goes wrong in a project, but it’s almost never the water. After all, that’s just putting pipes in the ground. The truth is that we didn’t pay enough attention to something that is routine.” He estimates that, in terms of lost revenue, extra construction costs, taxes, and the carrying charge on the bank loan, the water problem could cost Arcadia as much as a million dollars.
Last Harvest: From Cornfield to New Town Page 22
