New sign of end to boom in housing

Homebuilder Toll cuts sales forecast for 2006, but Md. outlook is good


Toll Brothers Inc., a national homebuilder with a substantial presence in Maryland, cut its sales estimate yesterday for the coming fiscal year, noting softening of the market, construction backlogs and an expectation of more-moderate home price increases.

It was the latest sign that the housing boom has passed its peak, although experts at two regional forums yesterday said Maryland is better protected from a cooling-off than other areas because of its tight housing supply and the expected arrival of tens of thousands of new defense jobs.

"It's a slowdown, but there's cautious optimism for this market," John Kortecamp, executive vice president of the Home Builders Association of Maryland, said in an interview at his group's annual construction forecast conference.

"With wages growing at such a modest but consistent rate and housing prices growing at a record pace for the past four years - over 20 percent a year - that's not sustainable. Something has to give, and it's given. We've hit it."

Toll Brothers, a Fortune 500 company that conducts about one-third of its activity in the Mid-Atlantic region, reported record quarterly revenue yesterday but dropped its expected deliveries of new homes for next year by 400 to 700 homes.

Toll's stock fell $5.50, or nearly 14 percent, to $33.91 yesterday, and an index of 16 builders compiled by Standard & Poor's tumbled 7.5 percent, the steepest decline since September 2001.

Nationally, sales of new and previously owned homes are expected to fall 5 percent to 10 percent next year, said David Berson, chief economist at Fannie Mae, who spoke at the homebuilders event.

Maryland's strong defense and biotechnology industries, coupled with the anticipated job growth from the realignment and closure of military bases elsewhere, are expected to help insulate the state, he said.

Prices of commercial real estate properties are expected to peak next year, and investors are bracing for acceptable but lower returns on their investments, according to a 2006 forecast by the Urban Land Institute and Pricewaterhousecoopers. The report was the subject of a meeting of institute commercial real estate members in Baltimore yesterday.

"We expect to ratchet down on returns," Peter Korpacz, who is in real estate business advisory services for PricewaterhouseCoopers, told the meeting. "There is a bias toward selling."

Investors surveyed by PricewaterhouseCoopers expressed concern that high energy costs might boost expenses for landlords and cut into consumer spending and travel, hurting the retail and hotel-motel industries.

The good news, Korpacz said, is that investment in commercial properties will remain strong in the coming year.

"There just is a lot of money out there, and it will act as a backstop if some capital pulls away," Korpacz said.

Investors are predicting more revenue growth from upscale hotels than in any other category of property, the forecast said. Real estate investment trusts and private funds are likely to continue to be strong buyers, while pension funds will continue to favor selling.

Economist Anirban Basu, chairman and chief executive officer of Sage Policy Group Inc., also reported good news for Maryland in the residential real estate market, titling his talk: "The Beginning of the End? Not Necessarily in Maryland."

Basu highlighted Hagerstown as one of the hottest housing markets in the country. Hagerstown reported an increase in appreciation approaching 30 percent - double the national average - from the second quarter of 2004 to the corresponding period this year.

Washington reported 26.2 percent appreciation for that time period, and Baltimore reported 17.5 percent.

Basu is more optimistic than some experts about real estate's continuing popularity as an investment.

"Even as interest rates start to rise, real estate might not fall out of favor as much as you might think," he said. "I don't think people will lose interest in real estate that quickly. It's a tangible asset."

Despite the recent increases in inventory, the number of houses on the market in the Baltimore region remains low, Basu said. And, given restrictions on building, the permits that builders do obtain are going to be used for higher-end housing, creating a significant gap in the type of housing available, he said.

"What isn't going to be served is the middle market," he said. Housing costing just under $200,000 to $250,000 "is what isn't served. This has the potential to really limit our economic potential going forward."

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