James Fisher

The News Journal

After a long period of volatility in Delaware’s real estate market – a housing boom followed by a devastating bust – real estate agents, home builders and consumers here are faced with a new reality: A normal market.

Buoyed by retirees moving in from border states with higher property taxes and second-home buyers, home sales have shown steady, if not spectacular growth.

For four straight years in Kent and Sussex counties, and for three years in New Castle County, the median home sales price has risen gradually, data from the Delaware Realtors Association show. That's a far cry from the five half of the last decade when home prices doubled, even tripled in some cases.

Whitepapers that used to describe the housing market as "volatile" now call it "balanced." The number of people who want to buy a home isn't too far out of whack with the homes they have the opportunity to buy.

"Clearly, before the crash, it was unbalanced on the side of demand," said George Sharpley, an economist with the Delaware Department of Labor. In other words, there were more interested buyers than there were available homes, so prices rose.

All of this is relief to people who watched home values soar then crash in the housing-driven bubble of the late 2000s. A key factor is the moderation of the new-home construction market, which is humming along but nowhere near as brisk as it was a decade ago.

"From an overall housing market perspective, much faster growth (in new construction) would put Delaware – I don’t want to say in danger of overbuilding, but it looks to me that continuing at this pace would not be a bad thing," said Kurt Rankin, an economist at The PNC Financial Services Group. "New construction is back to where we would expect it to be."

Who picks Delaware as the place they want to build a house and start a new life? Jim Ludwig and his wife, J.J., did, once Ludwig retired from a career selling BMWs and decided to leave New Jersey.

Ask Ludwig how he made the call to move to Delaware and he describes a process of kicking the tires of various states, studying taxes, likely homeowners association fees, insurance requirements and other factors.

"I wasn't collecting Social Security yet. It was all about the budget," Ludwig said. "I couldn’t stay in Jersey. I have a pension now and it’s much lower than my salary. I’m lucky to have a pension, of course."

The couple considered Florida. Downsides: property taxes of $2,000 to $3,000 a year for properties they studied, off-puttingly high for them even though it was much less than their Jersey home's tax bill. And, Ludwig said, the menu of insurance products he'd need to buy — flood, wind, sinkhole polices — deterred him. They thought about Cape May, New Jersey, an area they already liked from past visits. But "there wasn’t enough new developments going on and we wanted to build something ourselves," Ludwig said.

Then they turned to Delaware, a state some of their friends had already retired to. Ludwig approached home the way savvy customers approached his BMW lot to buy cars, researching incentives and comparing a lot of different models.

"We looked at 20 to 25 different developments and eight different builders," Ludwig said, recounting the research. "We shopped around. We ended up saying, the time is right."

In 2012 they bought a home in a Milton-area development where construction equipment is still a common sight as a third phase of building is underway and a companion development across the street is just getting started. Their pleasantly landscaped home overlooks a farm field, and has a open-plan first floor. One night in December, the Ludwigs hosted friends — another couple retired from New Jersey — for dinner. They ate appetizers and chatted as a lasagna baked in the oven of the spotless kitchen.

J.J. Ludwig said she was happy to be living in a community of homes, many of them owned by other retirees, in a clearly defined neighborhood. Lewes, she said, was quaint and charming; interesting restaurants there and in Rehoboth Beach were close by. She could see Milton, the nearest town, was expanding with new businesses — a wine bar, gift shops, a Mexican restaurant with modern touches — and she accounted for the region's economic health, in part, by thinking of all the out-of-towners choosing to move here.

"Milton has really changed since we've been here. I think it's all adapting to the New Jersey people now," J.J. Ludwig said.

How we got here

The tale is well-known. Starting around 2002 or 2003, Delaware's real estate market went into hyperdrive. "Rosy speculation, easy credit, and quick profits convinced people that housing was a low risk, high reward investment," a 2012 University of Delaware Center for Applied Demography and Survey Research report on the state's housing market said. In the course of a few years, from 2004 to 2007, average home values went up by 38 percent in Kent County and 48 percent in New Castle, the report said. That mirrored nationwide trends in the housing market, and in fact the swing was more pronounced in places like Nevada and California.

Seeing home values rise caused home construction companies to seek more permits to build new homes. Developers pulled 4,600 building permits for homes, duplexes and multifamily structures in 2000; then, in 2005, they obtained 8,200 permits for the year. Not every permit led to a completed structure in the year it was pulled, but it was a sign of the industry's frantic pace.

The boom also persuaded many more people to sell their existing homes, taking advantage of higher value. There were 13,300 sales of single-family homes in Delaware in 2005, a very high number compared to past trends. That, in turn, swelled local government revenues. With no sales tax and low income taxes, Delaware counties and municipalities pay close attention to trends in the transfer tax, paid by buyer and seller when a property changes hands. More transfers meant more transfer tax revenue.

The deflation of this price bubble, starting in 2007, reversed both trends. New construction plummeted, and sales of existing homes slowed, too. By 2011, developers were getting fewer than 3,000 building permits for the year, and only 7,200 properties changed hands.

"Home prices doubled in Delaware between 2000 and 2006. That was similar to what happened at the national level. In Sussex they actually tripled – the bubble was even greater," said Dolega, the TD Bank economist. And in that period, he noted, nearly 10,000 new homes were being built annually. "That pace of construction isn't sustainable," Dolega said. "It wasn't sustainable back then."

The correction clearly hurt buyers who bought in the mid-2000s, making many of their homes worth substantially less than they paid for them. The median sale price of a home in Sussex County, where beach towns saw the most pronounced effects of the boom, was $300,000 in 2005, according to figures provided by the Delaware Association of Realtors. By 2011, it was $245,000, an 18 percent drop.

During the recession, it was hard to tell whether a recovery in housing had started or not in Delaware; different figures told different stories. Sales volume hit its lowest level in Sussex in 2008 and then started to climb, but Sussex home values kept falling until 2011. In New Castle County, meanwhile, median sales prices fell until 2012 even though sales volume had bottomed out two years before.

But by the end of 2015, a housing market on the upswing was easier to spot. Median home values have climbed in Kent and Sussex counties every year since 2012, and in New Castle, since 2013, without a backtracking blip. Statewide, sales volume of homes has gone up every year since 2012.

"We’re continuing on this path of modest growth, and that’s really what we want to see," said Frank Serio, president of the Sussex County Association of Realtors. "We may have had better overall years in the last decade but, as we later found out, it wasn’t sustainable. This steady rate of growth leads to a much healthier overall real estate market."

Who is buying the homes? New families coming up from rentals, certainly, but also a burgeoning group of retirees. In Kent and Sussex County, especially, the typical homebuyer is a person or a couple ending their working years and making a decision about where to retire.

"What I'm seeing, personally, is we're still getting a very large influx of out-of-towners," said Fred Dean, a real estate agent in Lewes. "There are some local first-time homebuyers," he said, but they are not the bulk of his client list.

John Pinto, 59, and his wife moved to Sussex County from New Jersey in 2009, paying to build a large home on a three-quarter acre lot backed up to some woods. "We were looking at all these developments and the houses were all in open farm fields. We didn’t want that," Pinto said. And at the time, many lots in his development were unbuilt.

They were certain, Pinto said, they wanted to leave New Jersey and their $11,000 annual property tax bill behind when they retired. "It's throwing Social Security out the window," Pinto said of those taxes. He'd retired fairly early, but bought a Georgetown commercial building to keep up some income.

As his neighborhood built out, Pinto got the itch to find more secluded property. So he and his wife have already bought a second property, 10 acres of land near Redden State Forest, and are building a smaller home there, as a place they'll move to some time after their daughter finishes high school in a few years. In less than a decade of Delaware living, their housing spending has generated two transfer tax payments, two profits for other landowners, and two jobs for contractors.

"We’re downsizing and only making it a two-bedroom house. And the taxes are right," Pinto said. "It's a good find."

Many of the new homes being built in Rehoboth and Lewes are paid for by professionals from Baltimore, New Jersey or Washington, D.C., said Jeff Garrison, owner of Garrison Homes, a custom home builder that caters to wealthier clients building dream beach houses. Even if they're not ready to retire yet, Garrison said, they're taking advantage of cheap mortgage terms to borrow and build now.

During the height of the boom, Garrison said, his company built 75 to 80 homes a year. Now, they build 40, "but we're doing more high-end homes, so the dollars are mostly the same," Garrison said as he showed off a grand, three-story home under construction near Rehoboth and then a modern, cantilevered custom home around the block — two of his firm's current efforts.

"I think we're definitely back to normal," Garrison said.

Rob Elliott, a senior vice president at the Bridgeville home construction company Insight Homes, said retirees moving to Delaware from other areas are far and away the firm's main draw. "Eighty percent of our customers are from two to four hours away and over 60 years old," Elliott said. "I think the market is coming back for certain groups of people. Retirees, it's coming back for. We notice that for first-time buyers, not so much. That family of four, ages 25-40, they're struggling out there."

Remnants of the crash

Of course, not everything the housing crash broke has been put back in exactly the same place by the boom. One effect of the recession, statistics show, is that southern Delaware accounts for a higher share of the state's property sales activity than it did before the boom.

In 2005, one in every five homes sold in Delaware was located in Sussex County. But by 2015, one in every three Delaware homes that traded hands was a Sussex property. That came at the expense of New Castle County's sales pace. The annual home sales volume in New Castle has not come close to matching its high-water mark.

But in general, observers say Delaware has a fairly healthy real estate market at this exact moment. What could threaten to knock it off track in 2016? The prospect of rising interest rates worries some observers, As many expected, the Federal Reserve did raise a baseline interest rate in mid-December and suggested more hikes might come in 2016, but most experts think the Fed's moves won't make the difference between securing a mortgage and failing to qualify for most buyers.

Some marketwatchers said they were more worried by an uptick in Delaware's unemployment rate last year that reflects fewer families in a position to buy a home.

"There is a little bit of softness in Delaware," said Michael Dolega, an economist for TD Bank who routinely examines its real estate and new home construction data. "It's not a horrible story, but broadly speaking, payrolls in the state have slowed. The pace at which they're being added has slowed. The unemployment rate has climbed over the past five months ... All of this is driven by supply and demand. It's how many people want to be there and what they're willing to pay."

In Sussex County, planning and zoning staff tallied up some 10,000 units of planned housing that developer pushed far enough along to get land-use approvals for, but failed to actually build.

In 2011, and 2013, the county unilaterally extended deadlines for unfinished projects. Without the extensions, the developer approvals would have expired, and any investors who wanted to keep the projects going would have had to start asking for permits all over again.

In 2015, the county declined to issue a third blanket extension but told developers who wanted more time to write in explaining how close they were to breaking ground. Developer representatives who did seek extensions largely blamed unexpected delays in meeting state and county benchmarks for stormwater systems and road design, but some acknowledged they were still held back by market conditions. Others said they were having difficulty inking deals with subcontractors, now that their labor is once again in good demand.

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"The goal is to someday in the future when it is economic to develop the project and tie in the 37 lots to the new (wastewater) system," one developer, Daniel Foster, wrote in his request for a five-year extension for Nanticoke View, a project that got its first approvals in 2008. "I have already spent about $100,000 to date to get the project to this stage."

The County Council voted unanimously to deny the request. It has said no to projects comprising more than 400 homes, and is set to consider about 20 more marooned projects in late January accounting for thousands more potential homes.

Lawrence Lank, the county's planning and zoning director, said many of the developers who had been responsible for the planned total of 10,000 homes as yet unbuilt didn't ask for an extension, so their projects' approvals withered away on Dec. 31.

Elliott, the Insight Homes executive, said most companies involved in real estate during the boom and bust operate with a bit more caution now.

"Everyone's prepared. They're not sticking their necks out there. They're not saying, no matter what we do, homes and land will appreciate," Elliott said. "Obviously, that's not the case ... The land developers, for years, they were sitting on this stuff" — land with building potential — lucky if they could get 20 cents on the dollar. Now they went from kind of desperate to, 'We're in the right position.' If they try to eat the whole cookie at once, they may see some builders start to pull back. No one's judging whether they should be allowed to have a high asking price or not. But should that quarter-acre 30 minutes from the beach really cost $130,000?"

Will 2016 see further solid, steady growth in real estate? Interest rate hikes by the Fed aren't likely to dampen lending. Bankrate.com's nationwide average interest rate for a 30-year mortgage is 4.05 percent, not all that different from the 3.8 percent average a year ago.

"It may increase sales in the short run," said Sharpley, the Department of Labor economist. "People may want to get in before there's more increases." Sharpley also noted that if energy prices remain low, that could help Delaware's exurbs, like Middletown: "The last time energy prices really dropped like this, 10-15 years ago, that caused an exodus to the outer suburbs. People felt they could afford a longer commute."

Sagging energy prices also help the companies that do the work of new construction. "I hope gas stays down, because it affects a lot of our material building costs," said Garrison, the custom home builder. "If it's not made here, it's got to be trucked here."

Rankin, the PNC economist, said he didn't expect the Dow Chemical-DuPont merger, and DuPont's announced plans to cut thousands of Delaware jobs, will materially affect the housing market here: "Any individual employer is not going to have the means to move the needle, so to speak, throughout the entire state," Rankin said.

But Dolega, TD Bank's economist, said Delawareans who bought at the boom's apex shouldn't hold their breath waiting for home values to climb back to that peak.

"Generally, they just went up way too high to begin with," Dolega said. "It's a legacy of the previous bubble that's weighing on them."

As for the Ludwigs, while they're pleased with their home and their neighborhood, they still swing by open houses in other developments sometimes, just in case a real estate deal pops up. They may not move, but if they did, they'd notch another real estate transaction in the industry's ledger, pay another transfer tax, and keep the buying-and-selling wheel spinning.

"We’re keeping our eyes open in the newspaper," Jim Ludwig said. "We’re always looking, my wife and I."

Contact James Fisher at (302) 983-6772, on Twitter @JamesFisherTNJ or jfisher@delawareonline.com.