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Builders hurt by existing-home market, costs

As interest rates stabilize, the stock market rises and unemployment drops to the lowest level in more than four years, home builders are gearing up for a banner 1995, right?
No, they are hunkering down for another ho-hum year.
“I don’t think anybody’s planning on breaking any records,” said Rick Herman, executive vice president of the Rochester Home Builders Association Inc. “It’s still a time to lay low.”
But while area home builders are not stocking up on champagne, most are “out there surviving” by building less–and nothing on speculation, he said. They also are concentrating on selling off inventories.
Despite an ongoing economic expansion, he said, the new-home market is in a squeeze, caught between heavy competition from existing homes and high construction materials costs.
The average price of houses sold in the six-county area fell to $90,874 in January from $97,779 in December. January’s figure was down 10.4 percent from an average price of $101,472 a year earlier.
This downward trend hurts new-home builders two ways, Herman said.
First, it puts new homes in direct competition with older ones that to buyers may seem like more house for the money. And second, it discourages move-up buyers who must sell existing homes in order to buy a new one.
For builders, the irony is they find themselves competing against homes they built, sometimes as recently as a year ago, said Bruce Gerber, vice president of Gerber Homes Inc. and president of the Home Builders Association.
While home prices drop, lumber prices–which rose dramatically in early 1994–remain higher than previous levels.
“Margins can’t get much tighter,” Gerber said.
Here and nationwide, housing starts declined in 1994.
The U.S. Commerce Department reported that housing starts nationally fell 10 percent while building permits issued declined 8.6 percent.
Locally, Home Builders Association figures show 1,440 permits for residential construction issued in Monroe County last year compared with 1,756 in 1993, a 19 percent drop.
A more modest decline–997 permits in 1994 vs. 1,097 permits in 1993–took place in Wayne, Ontario, Yates and Livingston counties. That is an aggregate drop of 10 percent.
Herman predicted the numbers will continue to fall in 1995, with Monroe County permits sliding below the 1,400 mark.
Last year, rising interest rates chilled a fast start for his firm, said Carl Smith, Ryan Homes Inc. vice president for New York.
“We had a real good first half, real good, but in the fall it went way down,” he said. “There was a malaise in the market the last four months.”
The firm, which in the last two years ranked in the top two on the Rochester Business Journal’s annual list of area home builders, erected 136 homes in 1994 compared with 204 the previous year.
Competitor Mark IV Construction Co. Inc., which ranked second on last year’s list and third this year, fell off even more dramatically with 84 homes built in 1994 vs. 135 the previous year.
During 1993, mortgage rates dropped to 7 percent and below. They climbed back to the 8 percent to 9 percent range in 1994.
Like Gerber, Smith sees price competition from existing homes as a continuing challenge to builders. But he also thinks consumers are more resigned to higher mortgage rates.
Indeed, he voices new hope that last year’s trend will reverse.
“If you had asked me eight weeks ago, I would have said, “No way.’ But recently things have been looking up. In the last six weeks, we sold 32 houses.”
Of course, as Smith noted, last year began with a bang, too.

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