Monday, January 28, 2008

Developer Deals with Home Construction Slowdown

by Jim Zarroli
Thursday, September 7, 2007

The construction industry was one of the hardest-hit sectors in a Labor Department report released Friday.

The construction industry was one of the hardest-hit sectors in a Labor Department report released Friday. It lost 22,000 jobs last month. Homebuilders have been affected by the real estate slowdown, especially the small- and medium-sized developers who build most of the homes in the United States.

One developer in New York's Hudson River Valley says he has seen housing recessions before — but never one like this.

Steve Rieger stands in the two-story family room of a model home in a suburban development called The Legends. Houses here have all the features many buyers like these days — plenty of bathrooms, granite countertops, front and back stairs. Rieger and his brother helped develop The Legends next to a golf course in New York's Dutchess County. Their family has been building homes in the area since 1960.

"It's exciting to see the house come out of the ground. And to start with raw land and end with ... people's homes. We love going to closings and have people tell us how much they love their home," he said. "We really look at ourselves as providing the American dream to people who have worked hard their whole lives to afford it."

But these days, providing that dream has become a lot harder.

Rieger gets into his SUV and drives around the development's winding roads, which are still dotted with empty lots. Rieger, in his 50s, used to be a partner in a law firm before he quit to join the family business.

He has done well for himself. A few years ago, he said, people lined up to build homes here. Land prices went through the roof. But the Riegers are building half as many homes as they were two years ago. Revenue has slowed considerably.

"We've done OK up until now. We're going to have tough times now for the next six months, year, two years, however long it lasts," he said. "We're not going to make money going forward until the market improves."

Rieger stops to point out a house his company built on speculation. It went on the market six months ago at $899,000. Now, the price has been reduced by $40,000, but it hasn't sold.
Prices in Dutchess County have fallen 3 percent in a year, but many people expect them to drop more. If things don't turn around, Rieger knows he will have to consider layoffs. The company employs just 15 people, but it provides work to hundreds of subcontractors.

Assistant foreman Ron Mullaly, who was cleaning up construction debris at a newly built home across the road, said he has seen the job market change almost overnight.

"You talk to a lot of the subcontractors ... They're out there feeling the crunch too," he said. "And everybody's just hoping it's going to pick up again soon."

What caused this downturn is something Rieger thinks about a lot. He said housing prices have fallen before in the Hudson Valley, but only when there was an economic downturn. This time there's no recession. But Rieger said the negative news about the mortgage market has changed buyer psychology. People used to buy because they believed houses were a good investment. Now, they're not so sure.

"How can we expect that our customers will understand what's going on in the mortgage market? It's almost irrational, and it's frightening, and so, I am sure that it has frightened customers away," he said.

Rieger said the real estate industry shares some blame for what has happened. Prices went up so fast that a lot of people couldn't afford to buy.

"As prices became too high, the number of people who could buy the homes that we are all producing became smaller and smaller, and we ran ourselves off a cliff," he said.

Back at the model home, sales manager Betty Maddick showed floor plans to a young couple. Lisa Toohey said she and her husband, Kevin, have just started looking for a larger house.

"The timing is probably the best timing for us because you can get more for your money. I mean, the houses aren't selling like they used to sell," she said.

To Rieger, comments like that are actually a hopeful sign. He said at some point customer psychology will reverse itself. Prices will come down so much that people will start to think there are a lot of bargains to be had and begin buying again.

Rieger likes to think that point is coming soon, but then nothing about this downturn has been predictable so far.

--Jim Zarroli contributed this article.

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