WASHINGTON COUNTY

Editor's note: This is one in an occasional series of stories about the local housing market and what's happening to residents as they grapple with rising interest rates, tightening credit, falling home prices and other economic issues.

The home construction industry in Washington County has pretty much fallen through the floor over the past two years.

From January to September 2005, permits were issued to build 1,163 homes, according to figures from the Hagerstown and Washington County building permits offices.

In the same period this year, the figures show, builders got permits for just 360 houses.

That's a 70 percent drop.

Residential construction overall — from decks to garages to swimming pools to new homes — has fallen alarmingly. In the county's unincorporated areas, it sunk from an estimated $60.8 million from July to September 2005 to $20.9 milllion in the same period this year, according to the values county permit applicants report.

"Three years ago was good, and two years ago it went to hell. And this year, further hell," said Carl Gallahan, manager of Sellmore Industries' building materials distribution business in Hagerstown.

"...And not little changes, either. This year, it fell off the cliff," Gallahan said.

The plunge is a byproduct of the mortgage crisis nationwide. Home sales have plummeted as borrowers of subprime loans have defaulted and credit standards have tightened, making it harder for some to borrow.

New and existing houses have become much harder to sell, and prices nationwide have dropped. Many people who have borrowed against the value of their homes are seeing it drop. And among those still looking to buy is worry that the price they pay today won't hold up tomorrow.

"There's no buyer confidence out there. It's very low," said Dennis Swope, vice president of Home Construction Corp. of Hagerstown.

"Used to be, you'd put an existing house up for sale and it would go, and it was selling for more than it was listed, and this was just two or three years ago," Swope said.

"And customers for new homes weren't asking for discounts. Today, they're asking for discounts."

Swope, whose company is turning to remodeling work more and more, said his business is down about 50 percent over last year. Other builders estimated theirs has fallen at least 20 percent to 30 percent. And some suppliers are feeling the squeeze just as much.

"Drastically," an official of G.A. Miller Lumber Co. of Williamsport said. "We've been hurt. I tell you if it wouldn't be for the kitchen installs," the situation would be much worse, installation manager Ronnie White said.

"The home improvements in the area are doing good. The windows, the doors and our kitchen department, people are spending the money fixing up what they have, but the new construction, the drying up, has really hurt us," White said.

He said Miller, which "normally employs about 16 to 18 people," has been able to keep most of them. "As far as laying people off, we haven't really had much, but have been cutting hours."

For Hagerstown Block Co., whose products include the gray concrete blocks often used in new house foundations, business "has been a little bit slow," Plant Manager Bret Sprecher said.

"We're down some. We're kind of thinking this year's going to be worse. Fuel price is going up, starting to drive price of materials to us," he said.

Sprecher said his company has been able to keep its employment steady at about 50 because the company also sells retaining wall and architectural block.

"So where one backs off, the other kind of starts to pick up," he said. "... If we were making just strictly gray block, we would be tight."

The slowdown has also hurt big building supply stores like Lowe's of Hagerstown, which sells to contractors as well as home do-it-yourselfers.

"It's affected our sales some, but we're starting to pick back up. I don't know if it's just a good Christmas or not," Assistant Manager Stephanie Mills said.

Mills said her store is selling fewer whole-house packages for lighting and cosmetics that builders had been giving buyers as part of the purchase deals.

"There for a while, when houses were selling like crazy, we would have housing packages go out of here every day," she said. Now, "we still do have some," but it's a lot fewer.

At Sellmore, business is "probably off 25 percent this year over last year, and we were off 25 percent the year before," said Gallahan, who's worked in the industry about 40 years. "And, historically, we're always off over winter and Christmas, and it's just going to come down even more."

Gallahan said he had about 11 employees last year and is now down to nine, but he worries, too, about other companies in the industry.

Trickle-down effect

The negative effect "trickles right down. It's like you have a lot of homebuilders out there used to do 150 homes. Now they're doing like maybe 20, maybe 30 ... They employ a lot of electricians, framers, plumbers," who now have had to find home-improvement jobs.

Gallahan said some local contractors, whom he declined to name, have been forced out of business.

He said he worries about builders who have money tied up in houses they built on speculation as models or as inventory.

"That's a lot of money sitting there that a lot of builders aren't closing on," Gallahan said.

"What I'm hearing," said White, "is some homebuilders are sitting on five to six spec homes. ...

"I worry about these people more than us because we have the home improvement (business) and some of these guys don't have the home improvement license. ... They've got to be hurting."

Builders worry, too.

Swope said he has become "very conservative" in deciding how many spec homes to build. "I have three for sale and currently under construction, and that's as far as I'll go," he said.

Tim Fields, co-owner of Royal House Construction Inc. and president of the Homebuilders Association of Washington County, knows many local builders have such concerns.

Fields said he thinks business for many of them will be down more than 20 percent this year, but his won't suffer quite as much. That's because almost all of the 10 or 12 he'd build in a normal year would be pre-sold.

Though he will build fewer this year, some will be larger than usual and, in general, his customers will be residents who bought land years ago and are ready to build, he said.

So he is pushing ahead with the one spec home he usually builds each year.

"I don't subscribe to the theory that the sky is really falling," he said. "I think there are skeptics and a lot of that is probably based in realism."

Taylor Oliver, president of Oliver Homes Inc. of Hagerstown, said there is a bright spot — Pennsylvania — in the local homebuilding market.

Oliver said he began moving some of his business to Pennsylvania about five years ago. Of the 50 houses he's built in the past year, probably about 30 are in Pennsylvania, he said.

Crossing the line

"Saleswise, we're down about 25 or 30 percent" this year and his work force of about 50 is "down slightly" over a year ago, he said.

The market in Pennsylvania is better now than in Washington County, particularly because those areas don't have the excise tax, other fees and regulations that make building more expensive in this county, he said.

"We pay $442 for a building permit on any house in Pennsylvania," Oliver said. "Here, in Washington County, we pay $13,650 — which includes the $13,000 excise tax" the county charges when it issues a permit for a new house.

The extra cost is a burden local homebuilders and buyers must shoulder in addition to the economic problems nationwide, contractors said. One result here, said Oliver, is "realistically, a lot of people from Washington County are just moving across the line. They can't afford to be here."

Another problem for homegrown contractors arose a few years ago when national builders, following the market out to the suburbs, came here with city-sized budgets.

"We had a kick in the pocket two years ago when land prices went crazy," Swope said. "Lots that were selling for $40,000 to $50,000 all of a sudden went to $90,000 or $100,000. Mostly that was caused by the large builders coming to town and paying astronomical prices. Everybody else's land value went up with it.

"And now that things have slowed down, it has caused a correction in the market."

But landowners have been reluctant to accept lower prices. So, local builders said, they have been largely shut out of the local market for large properties for housing developments.

"Today, I cannot afford to go out and buy tracts of land. You have to have deep pockets to do that," said Swope, who has been with Home Construction since 1969.

Instead, his company is developing land it purchased in Hagerstown's North End in the 1970s and buying single-home lots here and there. "Little guys like us, we're only building 10 to 15 a year," he said.

Worsening the situation, builders said, is that the large developers who have been coming here are reacting to the national economic slowdown by offering deep discounts on some houses.

This adds to consumers' uncertainty over value throughout the county, homebuilders association president Fields said. "When there's a full-page ad offering $40,000 worth of discounts if you buy this weekend, that certainly introduces doubt. We do hear comments (from customers) about that."

Local builders have been lowering prices, too, but in less splashy ways.

Oliver, for instance, said his company has been doing "some discounting and promotions and those types of things." One area of cost-cutting might be changing the toilet you offer in a house to "another toilet that's, say, $20 cheaper," he said.

As to when the home construction picture will get brighter, the numbers aren't encouraging.

This past October, permits for 31 new houses were issued in all areas of the county except the small towns, compared to 60 in October 2006.

And, according to figures compiled Friday, in the month just ended — from Nov. 1 through Thursday, Nov. 29 — permits for only 18 new houses were issued. That is far fewer than the 113 issued during the entire month of November in 2006.

Swope said the situation would not improve "until the buyer realizes prices have stabilized and aren't going to go lower."

Fields has another theory.

He thinks some glimmer of hope will begin to emerge by early next summer when, he figures, the national builders' large inventory of local homes "will be pretty well sold off."

Then, he said cautiously, "things could start to improve. ... And, that's not to suggest that they'll be getting back to normal ... I'm not saying back to what they had been, but just beginning."