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Major Housing Markets in the West in for a Tough Year
In the wrong place at the wrong time, many new residential communities in the West are going to have a tough time weathering the current housing downturn, John Burns, of John Burns Real Estate Consulting, told a PCBC audience in San Francisco last month.
Looking at the fundamentals for housing demand, “there’s nothing wrong with the national economy, and that’s some good underlying news,” Burns said.
Even so, prices are down 15% from their peak and sales are down 70% from a year earlier in some California communities, he said, affordability is the worst since 1982 and large builders have been announcing layoffs. Noting that land prices are down 30% from October, he said that “any deals since last year are not worth what you negotiated.”
The developments most likely to suffer are those that have been built on the outskirts and too far away from jobs, he said. What makes the situation worse is that they have tended to be built in clusters, because they are in locations where land has been available and comparatively affordable, so that there is plenty of competition around.
The Best and the Worst
Prone to falling prices and oversupply problems, Las Vegas, Central California and the state’s Inland Empire are the worst markets to be in, Burns said. Coastal California; Portland, Ore.; and Seattle, on the other hand, are most prone to affordability problems because land shortages and government regulation in these spots have made it tough for builders to keep up with demand. Phoenix; Tucson, Ariz.; and Salt Lake City need to start worrying about a supply glut. And then there are places like Buffalo, N.Y., where there is virtually no worry about a housing bubble because “nobody wants to live there.”
Annual building permits rose from 15,000 a year in 1990 to 70,000 last year in Phoenix and from 15,000 in 1991 to more than 40,000 in Las Vegas in 2005, he said.
“Phoenix is the ultimate example of rising resale competition,” he said. “There are 100,000 more people employed in Phoenix than a year ago,” but median resale prices shot up 36% in that market in 2005, reaching $260,000 in October, and that was driven largely by speculation.
More than half of the homes sold in Phoenix last year were purchased by people who don’t live there full time, he said. But “a lot of the price appreciation in Phoenix is permanent because of good paying jobs.” The affordability equation is working similarly in Las Vegas.
Both prices and sales volume peaked in Phoenix in October, with listings of about 25,000, he said. By April, listings exceeded 40,000. The market’s resale listings are higher on the outskirts of town, and those are the same places where new construction has been concentrated. People moving into the area are coming largely from California and they don’t want to live that far away from their jobs, Burns said.
Homes in outlying locations are showing similar vulnerability in Riverside-San Bernardino, Calif., he said, where communities close to the job center in Orange County are doing well and those in points south are softening, and in Sacramento, where there are nine communities to the north of the city “where not everyone wants to live.”
The Desperate Seller
“The desperate seller in the market today is the guy who has to sell four homes a month and there are 10 other (competing) communities within a mile,” Burns said.
He also observed that it is becoming evident that “job proximity is better than a lower price in a competitive submarket.”
In Central California, permit activity reached a peak of 36,000 last year, Burns said, but unfortunately, “you can’t drive from Modesto to a job in the Bay Area.” In stark contrast, there were only 25,000 units last year for metropolitan Los Angeles and its population of 10 million. L.A. sales have been “trickling down,” he said, compared to a rapid sales decline in the San Francisco area.
On the job front, Los Angeles has been booming, he said, with 90,000 jobs created on the San Fernando side of town, while the rest of the economies in Southern California have been sagging a bit. The Seattle and Bay Area tech markets have rebounded strongly, contributing to job growth of 60,000 and 40,000, respectively, and Sacramento is solid with the annual addition of 27,000 jobs.
San Diego is 22 months into a sales decline, Burns said, and in a market where condos can easily cost $800,000 there is a short supply of affordably priced housing. However, research in this market shows that “affordability is much better if you are a home owner than if you are a renter. Only about 10% of area residents can afford to buy the median-priced resale home, he said, but 50% of those in the market who have owned their home for seven years can afford it.
Comeback potential looks “great” in San Francisco and Sacramento, he said, but for the year ahead their outlooks are only modest to poor. The long-term outlook is good in Seattle; Portland, Las Vegas and Phoenix, but it is modest in Tucson.
In Southern California, the Low Desert area of the Inland Empire is “the worst market in the U.S.,” he said, with 8,200 permits. Its potential outlook is modest, compared to great potential for North Los Angeles, Orange County and the High Desert. Bakersfield, Calif. and San Diego look poor for the year ahead, but good longer out.
Surviving the Downturn
To survive the downturn, Burns advised builders to monitor market conditions closely. “Your sales people better know everything going on in this market,” he said. To see what he’s talking about, he said “Go to Denver and Austin; they’re hungry and know their market.”
Although new housing constitutes only 15% of the market, home builders can capitalize on their advantage over resales by targeting their product to buyers who can’t find what they want in the existing market.
Incentives to buyers are working, Burns said, but “get away from other builders,” especially master-planned communities that are “full of large builders who have to get sales."
“Most important,” he said, “look at your company with a clean state” and ask yourself if “you have the right team, assets, etc. for the next five years. Imagine you were brought in to take over the company today.”
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