New Construction

Decade of New Construction

Better to Buy or Build?

This question comes about in almost every new client conversation I have. There are those diehards that refuse to live in a new house, and there are those who want a maintenance free home from the start. (no such thing by the way – but new homes are certainly less). Personal tastes aside, there is always a financial question regarding which is better. It is the goal of every seller, whether builder or homeowner, to maximize their price at the sale of a home. There may be some other factors on the table regarding timing, but it all comes down to the final net price to seller. Always.

So, prices tend to go up and down in tandem for resale and new construction. Sometimes, one lags the other, but in general, when prices are rising, they are going up for both types of sellers. For that reason, the percentage of sales that are new construction tend to be pretty flat in good times and bad. I’m not saying that new homes keep selling, I’m saying that as a percentage of total sales, they remain fairly constant.

When we look at the last decade, this is certainly what we see. From 2003 to 2011, the percentage of total sales that were new construction (Albemarle and Charlottesville only) remained between 16.7% and 18.0%, and in 7 of those years, it was even tighter, between 16.6% and 17.1%. Not a lot of variance.

But in 2012, we saw a major shift. In Oct of 2011, builders began getting advance warning from their suppliers that prices were going up. Drywall, lumber, you name it… Prices went up. And we’re not talking 2% here. In 2012, prices on drywall went up roughly 30%. And in January of this year, prices went up another 20%+. 2012 saw lumber prices up 44%. And that drives new home prices up. Nationally, the average new home contains roughly 45% of it’s cost in materials. And when they go up as significantly as they have, there is little way to protect the profit without ratcheting prices up.

But good news may be on the horizon. Lumber commodity future point to as much as a 25% decline in prices from mills as China demand decreases and output from Canada increases.

So, here is the interesting thing. 2012, saw the first major drop in new construction. Builders may not have even noticed. The actual number of new homes sold in 2012 (266) was the highest in any year since 2007 (376 – so we are still a long way off the bubble path). But while there was a 4.7% increase in new construction sales in Charlottesville and Albemarle, that paled in comparison to the 15.7% increase in total sales. End result is that the percentage of homes sold in Charlottesville and Albemarle that were new construction went from 16.7% to 15.1%. (Explanation of the Graph: Blue and Green columns represent the total number of homes sold and total number of new construction homes each year. The yellow line is the ratio of new construction to total market.)

NewConstructionWhat brings this back? Two things are possible, likely a combination of the two will play out.

The first is that material prices come back down. As the lumber news points, there should be some relief from manufacturers as output increases. This won’t bring it back to par, but it will allow some relaxing of prices.

The second option is that resale homes will see a price increase. (It has been many years since I said that and it feels pretty good.) As long as resale prices remain depressed, the builder market will have a tough time competing. My bet is that 2013 sees better numbers than 2012 for new construction, but not back to the 2011 16.7%.

RiverBluff – In the Residents’ Own Words

At Nest we represent a lot of different clients in different types of projects. I have been honored to be a part of a great project in RiverBluff. Comprised of nearly 19 acres along the banks and bluffs of the Rivanna River, RiverBluff is only a mile from the Downtown Mall and part of the nearly 20 mile trail that surrounds the whole city, meaning that biking and walking is convenient. And of the 19 acres, only about three acres is actually built on, leaving the remaining space as common land.

Hear what our residents have to say about living at RiverBluff and why the chose to live there.

Product Mix

Talk to a marketer and you will hear this term frequently: “Product Mix”. It refers to the breakdown of a market and precisely what is selling. This then allows companies to focus on what to manufacture. Imagine a computer company determining whether to build desktop or laptop computers. A quick look at the product mix of what is selling allows them to divert resources to the appropriate market.

Builders operate in much the same way. The problem is that a project must go to the city or county months or years before construction begins, and that can be 6 months or more before the first buyer can occupy the residence. Therefore, there is always the risk of over building a certain type of home. Below you will see a graph by quarter from 2003 to Present for the combined Charlottesville and Albemarle markets. Each line represents a product type: Detached, Attached, and Condo.

(Click on the graph for a larger image.)
YearEndWrapUp.jpg The quickest thing most folks will notice is the enormous bump that occurred in the 1st quarter of 2005 when the first condo conversions became available to the general public. The condo market was steady until it got another bump mid year 2006 and then slowed until the end of 2008 when it hit the skids.

This is a fascinating tale of what the right project was to work on then… and not now…

Builders watched as the early developers sold their stock quickly, but trends shift, and the developers who brought condos on the market at the end of 2008 were greeted with credit issues as well as an over built market.

Contrast this with attached homes which saw a bump in prevalence just as condos were slowing. While I cannot state for sure that I know what was happening, I do have a theory here. Detached homes tend to be the priciest of the three product types. Therefore, those who may not be able to afford the 3BR/2BA home on a 1/2 acre in the county look to more affordable options. Those options tend to be condos and townhouses. When credit became impossible to get on condo projects, the attached home was the only solution.

But, take a look at the last 3 quarters where detached homes have grown in popularity even while attached homes fall off sharply. This coincides with the convergence of prices across the different product types. For the first 9 months of the year in the city, the median home price of a townhouse was $242,000. But the detached home price median in the city was only $261,000. A difference of only $19,000. That’s just over $86 month in mortgage payments on an 80% loan.

So what does product mix tell us about the future market? It says that as long as the price between detached homes and their counterparts are small, the detached homes should continue to rise as a percentage of the sales. It also reiterates that we need financing to be eased in reference to condo projects.

Mid-Year Report – Condos

On Friday, we put the finishing touches on the Nest Report, Nest Realty Group’s Midyear report. (For a pdf version, click here.)

One of the interesting things that we started talking about in the office was the future of Condo projects in and around Charlottesville. From the Nest Report:

Both City and County condominium sales continue to slide as well. There have been a total of 32 condos sold in the County so far (off 25.6%) and 25 sold in the City (down 46.8%). However, Charlottesville City condo sales rebounded quite well in the Q2 2009 with 22 total sales, bouncing back from a dismal Q1 which saw only 3 transactions close. There are still condo projects in front of the City Planning Department with the potential for near-future development. Whether or not those projects can obtain funding, and when they will be built is still up in the air. Additionally, we fully expect the absorption rate (time it will take for new condos to be purchased) to be lengthy compared to years past, as some of these projects are approved to include more housing units than have sold across the whole city this year.

I thought I would expand a tad on what I said in that last sentence. There are some projects that have been approved that include more units than have sold in the last year. This is absolutely the case, and its not a small number. I called the city asking for a current “development report” and they have not put one together in the last 15 months. So, what I have is not on the newer side, but the projects that haven’t been built yet, are still lingering out there with approvals ready to go.


The only major condominium project downtown that is under construction at this point is The Gleason. According to the most recent City report, the Gleason was approved for up to 65 units. The Gleason web site shows 36 residential units are being built, along with two floors of office and two (partial) levels of retail space. Of the 36 residential spaces, 16 are shown as sold, leaving 20 units, 80% of the city sales thus far this year. In addition to The Gleason, other projects in the downtown area that are approved by the City are:

  • Comyn Hall Condos – Approved for 11 units – Park and Parkway
  • Waterhouse – 65 Units – Between Water and South Street
  • The 550 – 12 Residential Units and 10,000 S.F. of Commercial located on Water Street in the old train station. (7 of the units are priced at $1.195 million for the shell)

Projects that have gone before the planning commission, but whose outcome has not been updated by the Neighborhood Development Services on their web site include:

  • Grove Square – Applied for 24 Units – Rosie Brown Blvd and Grove, along the RR Tracks
  • Coal Tower Property – Applied for 287 Units – Running the North side of the RR Tracks from Carlton to 10th Street
  • Sycamore 10.5 – Applied for 16 Units – On West Main in the old Under The Roof location
  • 201 Avon Street – 100 Units – The old Beck-Cohen building
  • The Station – 25 Units – Across from the Gleason on Garret Street

And this listing is still partial, and focuses only on the area in downtown. Further, it does not touch on the condos that have been built and have not yet been sold. Condo sales can be driven up by a great project, but the buyers have to be there to make these projects make sense. The Beck Cohen project for instance was once announced to be a LEED registered project. With 100 units on the line, a developer is going to need more than 70 reservations / contracts for sale to make this project move forward.

Most likely, what you will see is a few of these projects getting built in the next few years, but they will be scaled back. It would not surprise me to see the Gleason be the last condo project of its size built for at least 3 years. Other projects are going to look for smaller footprints, lower costs, and easier break-even points. And even then, developers are going to be looking for enough contracts to guarantee they won’t lose money even in the worst case scenario.


2009 Condos sold Jan 1, 2009 – June 30, 2009

8 in 1800 JPA
3 at Monticello Overlook
2 at The Randolph
1 at McGuffey Hill
5 at Walker Square
2 at Cream Street
1 at Belmont Lofts
2 at Melbourne Park
1 at Wertland Commons
1 at The Corner Village  
and 1 at The Economod Condo

(NOTE: There are 27 condos listed here. The Nest Report states 25. The difference results from Realtors who input sales late. We pull data for the Nest Report on one day to write the larger report. However, the information here was pulled today, July 20, 2009.)

The Changing Face of Builders

I had a client in my car last week as we drove through Northern Albemarle County neighborhoods. We were talking about some of the new subdivisions that were being worked on, and we drove through at least one new neighborhood that was did not have any activity at all. As we pulled into Greene County, my client asked about the Ryan Homes that were being built on the Western Side of 29 at Holly Hill. He remarked that they looked just like one of the neighborhoods in DC that he remembered being built several years ago. It got me thinking about Ryan and the landscape of Charlottesville new construction.

05 to 08.jpg

So, I came home and pulled two pieces of information. First off, I grabbed all the new construction that closed between July 1 and December 31 of 2005, and then I pulled the same data for the same period of 2008. Not surprisingly, there were a lot less homes sold in 2008 than in 2005. I did not select only one county or another, I pulled the whole MLS. And what I found was not surprising, but when you look at it visually, it is pretty clear: the builder landscape is changing, and its changing fast.

In the second half of 2005 there were 99 builders that sold property in our area. Ninety Nine… That’s huge given the size of our market. As you look at the graph to the right, you will see that there were only 6 builders who held more than a 2% market share, the largest of whom was Hauser Homes. In 2005, Hauser was flying high with a new sales center on Route 29. They had brought in a new mortgage company to add to their all around sales effort. Bob Hauser was touting a new neighborhood that would be coming along in the next few years that he and Frank Stoner at Stonehaus were working on: Belvedere. Hauser was starting a custom home building division and had two custom jobs going in Old Trail. Further, he was moving into the high end condo / townhouse market with pricey Poplar Glen.

Not far down the list was Church Hill Homes who seemed to be able to do no wrong in the market. They launched the new Avon Park, and all the units flew off the market faster than the builder could put them up. The bought land in Wickham Pond, in Belvedere, in other counties. Church Hill was moving along. But how could they do wrong? It was 2005 and if you built it, they would buy it. There were so many builders in 2005, that 46% of the market was served by 89 builders.

05 to 08-1.jpg Important to note in the list of top 10 builders in 2005 is the absence of any major national home builder. There were rumors that Toll Bros. might be looking at coming into Charlottesville, but it never materialized. In 2006, Ryan Homes entered the Charlottesville game. The builder eyes watched as Ryan opened up shop at Old Trail with 27 lots. They entered into agreements with Kenridge near Farmington Country Club and Cherry Hill in Johnson Village. Everyone watched to see what would happen and whether Charlottesville natives would shun the outsider giant and their production build mentality. After several months, Ryan walked away from almost all the lots at Old Trail. After 3 years, they walked away from the remaining lots at Kenridge. Many could say that Ryan was not successful in Charlottesville.

However, they’d be sorely mistaken. Ryan sold out Cherry Hill, they moved to the Pavilions at Pantops, they built at the Hollymead Towncenter, they built at Holly Hill… and more… They may not have struck gold in their high end practice, but they certainly proved that a national homebuilder can compete with the locals. Maybe Brueggars can’t beat Bodo’s in a head to head, but Ryan is showing some serious strength in proving a strong value proposition for their homes.

When you look from 2005 to 2008 numbers, you notice that once unstoppable Hauser Homes has dropped from a 13% market share down to 4%. While 2005 may have had 99 builders closing on properties in the second half of the year, there were only 72 builders by 2008. And outside the top 10 builders, the market share dropped from a cumulative 46% to 44%. The biggest winner was Ryan Homes. Within less than three years in our area, they went from a zero market share to 24%. I have heard it said that they want a 50% market share in 2009. I can’t say if that is a real goal or simply a rumor, but if it is their goal, I think it is achievable.

In 2008, Church Hill still made the list despite their foreclosures and sale to Eagle Construction of Richmond. This would be the last quarter we will see Church Hill making sales under their own name. Sam Craig, with Craig Builders made the top 10 list. Most interesting of all in my opinion is that Southern Development has managing to hold on to their market share throughout it all, which is a testament to their flexibility.

I find all of this interesting, but what I really look forward to is seeing how the market shakes out when a rebound does occur. Will Ryan just grow faster? Over this period, on a National level, Pulte Homes lost over 60% of its market value, and Centex Homes lost over 80% of its value. Ryan (NVR) lost just under 40%, which may not sound great, but for a home builder in this era, its pretty good.

Back to top

Twitter links powered by Tweet This v1.8.3, a WordPress plugin for Twitter.