not starters.
Ron Smith has nothing against affordable housing. But right now, starter homes are not profitable for Smith and other builders because of the rising costs of land and municipal permitting fees.
Smith, vice president of sales at Picerne Real Estate Group in Warwick, said these factors are contributing to the fact that many people are being priced out of the market.
"I would love to build for first-time homebuyers but you just can’t anymore," he said. "There’s a lot of zoning and planning and towns wanting to restrict building by keeping open space and imposing impact fees, and what it’s doing is driving up the cost of land and driving up the cost of development of that land.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
"If you have a $100,000 lot, you can’t build a $150,000 house there, and we can’t find land cheaper than that. Even if we do find cheaper land, you can’t develop it cheaply."
Developing is so expensive in the state, said Roger Warren, executive director of Rhode Island Builders Association, that it just doesn’t make sense for builders to build starter homes anymore.
"Development costs are passed onto the builders, and they have to make a decision on how to get the cost out of each building and make a profit," he said.
Chris Barnett, a spokesperson for Rhode Island Housing and Mortgage Financing Corporation, which assists first-time homebuyers bemoans the fact that there are just fewer of what he calls the "Leave-It-To-Beaver" homes being built today in places like Cranston and Warwick.
"A generation or two ago homebuilders focused on the starter market," he said. "Not today. The luxury market is where the money is, and being business people, builders are chasing it."
Smith believes there is a misconception about the kind of profit that builders are turning.
"A lot of people think builders are making a mint, but we’re not," he said. "If my margins are slightly higher than what they were three years ago, we’re just spending more to get to the same point. The percentage of profit is almost the same."
Dana Phillips, a real estate broker and owner of RE/MAX Post Road Realty in North Kingstown, explained the formula.
"Builders like it when the land acquisition costs represent 25 percent of the total build out," he said. "In a typical situation if the builder is paying $100,000 for a lot they’re going to want to put a $300,000 house on it. And the reason that the lots are so expensive is that there are no lots available. The smaller builders are out hunting and pecking for lots."
Smith agreed that this crunch is hurting the smaller developers.
"It’s hurting the smaller builders and developers because they don’t have the cash to lay out there," he said. "We have the cash but don’t like putting it out there."
Bob DeBlois, owner of DeBlois Building Company in Warwick, said he has always preferred to specialize in the lower end of the market, but the towns have restricted the development process in such a manner that the economics don’t make sense.
"We’re the state with the least amount of land and we divide it into one acre, two-acre, and five-acre zonings," he said. "If you look at bigger states like Colorado or Texas, they’re still building houses on 8,000 square feet of property."
He said, "It seems like the towns are trying to make it difficult to build."
Despite less affordable houses, DeBlois said he is busier now than he’s been in years.
In fact, single-family home building permits in Rhode Island increased by 18.7 percent in the first quarter of 2002, compared to 2001, according to a recent report by RI Builders. The report stated that building permits in the state totaled 538 compared to 437 in 2001.
"The market is showing strength compared to last year but you have to remember we were at a five-year low last year with 2,169 permits," said Warren. "We still have a huge demand so the prices continue to rise. Just ask anyone who is looking for a home."
When asked what would bring houses back to more affordable prices, DeBlois responded, "a good recession."
