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Buyers Market in California Likely to Be Short-Lived
In a state whose tough regulatory climate has made it difficult for home builders to keep up with the demand for housing, most major markets have now entered into a relatively mild slowdown that will stabilize conditions as levels of existing inventory are worked down, according to representatives from the industry appearing at PCBC in San Francisco toward the end of last month.
“The next two to four months will be a telling time for us,” said Layne Marceau, chairman of the California Building Industry Association (CBIA) and a division president of Shea Homes. Comparing today’s predicament to one faced by car dealers every year, the association leader said that builders will be busy “moving ’06s off the lot so we can get ’07s in.”
The departure of speculators from the housing market and high prices are forcing builders to market completed homes more aggressively, Marceau said, creating “a short-term buyers market, probably the best buyers will see,” before things return to normal.
The end of California’s housing boom “means supply and demand for $500,000 homes in Sacramento and the Inland Empire and $700,000 homes in the Bay Area and San Diego are pretty well balanced,” Marceau said. “However, the demand for entry-level homes and condos continues to be largely unmet.”
Affordability Doesn't Pencil Out
Marceau said that affordably priced homes “aren’t penciling out” in most parts of the state because of a scarcity of developable land and impact fees that now average in the $50,000-$60,000 range and can total $100,000 or more in several communities.
“The bottom line remains the same: if the dirt costs $150,000 and the fee load is in the vicinity of $100,000, you can’t build a $300,000 entry-level home,” he said.
Marceau noted that California’s current 58% homeownership rate puts it in 49th place among the 50 states and represents a 12 point gap with a national homeownership rate of 70%.
Alan Nevin, CBIA’s chief economist, said that he expects 170,000-180,000 total housing starts in the state this year, a 15%-20% decline from 2005.
In the meantime, “good things are happening” in California’s economy, he said, which will gain about 200,000 jobs this year. There will also be no decline in construction jobs in the state despite less home building activity because of a pickup in infrastructure and commercial building and residential alterations, all three of which “are going full-bore.”
Multifamily Holding Its Own
Although single-family production has slowed in most parts of the state, with the most significant declines in Sacramento and the San Joaquin Valley, multifamily starts are holding up in Los Angeles, San Francisco and Orange counties, Nevin said, with San Diego a notable exception.
‘We haven’t seen any single-family inventory for years,” he said, but the inventory that has materialized in recent months “is still very low and will burn off as it always does.”
Houses that are “priced right” can still sell in 30-45 days, he said, and the 60-day resales now occurring are normal, he said. However, home sellers whose prices are unrealistically high can expect to see their homes languish for some time before they are sold — six months or more.
In a fast-growing economy with good interest rates, Nevin predicted that home price appreciation would average in the 0%-5% range following the rapid run-ups in prices in the past few years.
Some Construction and Land Price Relief
Also, slowing production is expected to bring some relief in land prices and construction costs, he said. The latter have been rising10%-15% annually over the past three years.
Bob Rivinius, CBIA president, said that “a keen interest in making the best of these times” pushed up attendance at this year’s PCBC to 35,000, up from 29,000 in 2005.
NAHB President David Pressly noted a similar interest among home builders nationwide and he said that the association’s members are relying more heavily on networking, educational and advocacy opportunities to address affordability issues and deal with a diminution in production and sales.
Elimination of housing tax incentives, including the mortgage interest tax deduction, that were contained in proposals sent by an Administration commission to the Treasury last year, would put some dark clouds over the industry if they were enacted, Pressly said, particularly in California, where housing is so high-priced.
“We remain vigilant on these pernicious proposals,” he said, “but they won’t come up this year because of elections for Congress.”
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