The Sound of Hammering
By Virginia Butterfield
The first whisper of good times came in the summer of 1996. Alert builders like Steve Doyle, president of Brookfield Homes, pricked up their ears. After six years of the worst recession in decades, builders began to smile. And to feel optimistic. And to talk permits.
They didn’t necessarily share their views with colleagues, as timing is a very important, but personal, element in the housing industry. If you start your process too early—or too late—you’re in trouble. Mark McMillin, scion of the Corky McMillin housing empire and president of the McMillin Companies, confesses to acting too soon.
“I thought I saw the turnaround in ’94 and ’95,” he sighs. Don’t worry. In an empire as large as McMillin Companies, a few premature houses would be a drop in the bucket. Mark, brother Scott and their dad head up the largest independent construction, mortgage and real estate conglomerate in San Diego.
Brookfield’s Doyle figured closer to the mark. He set the turnaround time as the middle of 1996.
What gave him the idea then that the time it was a-ripenin’? 1996 was the first year since the deep recession began that net migration into San Diego was a positive figure. “It was a turn in population growth for the state of California,” Doyle says. “I saw three key factors—jobs, household formation [grown kids not living with their parents anymore] and population—going in a positive direction in the summer of ’96.
“But I never expected things to go this fast. Usually we have 5 percent growth; that’s a nice normal figure. Now we’re looking at double digits for ’97.”
The real estate market is truly popping. Buyers are queuing up as new tract homes come on the market—they’re hoping to be the first in line for the models they’ve chosen. On resales, buyers are offering over the asking price for hot properties. Rental vacancies are below 2 percent.
“Things are fun again,” says Mark McMillin. “For a long time we were bogged down in three- or four-legged contingencies.” (Translation: The customer has to sell his current house; his buyer has a house to sell; and so on down the line. And since very few people could sell anything, closings dragged on forever.)
“We’ve not had this kind of demand in seven years,” says Doyle. “People are beating on our door, wanting homes.”
Why is everybody suddenly ready to buy? “Consumer confidence is up,” says McMillin. “It’s an intangible. Outside elements start touching us. Maybe your neighbor got a job, or his first raise in four years. Now it’s fun for the consumer, too.”
It’s more than an intangible, say others. Fueled by a rapidly growing economy, San Diego County’s real estate market is definitely running strong. An E&Y Kenneth Leventhal report states: “With new jobs being created in the high-technology and biotech arenas and a major military presence that has actually been strengthened by the Base Realignment and Closure process, all the real estate markets in San Diego County have been tightening dramatically.” Builders are happy to be back at work—and incidentally, their labor forces account for 25 percent of the new jobs nationally.
The tightening is especially true in coastal North County, along the Interstate 5 corridor. And also inland, along the Interstate 15 corridor. “Activity in Carmel Valley and Carlsbad has doubled,” says Peter Dennehy, managing director of the Meyers Group, a local firm that keeps statistical track of such matters. “Also in Scripps Ranch Village in Poway. It’s also happening in South Bay—although that section hasn’t pulled from other parts of the county yet,” he says. Apparently Chula Vista attracts more buyers from among its own move-up residents than from North County home-seekers looking south.
Dennehy rattles off the names of areas that will see rapid growth in the next two years: “Mission Valley, Kearny Mesa around Aero Drive, [property near] University Towne Centre, Aviara in Carlsbad, Del Mar, even Coronado. Detached homes are selling like crazy.”
In a Meyers Group ranking of 15 San Diego communities, we get a glimpse of why some areas are “hot” while others are less so. Carlsbad is ranked at the top, with high levels of housing available, a great climate, good availability of retail services and a relatively strong local employment base. Carmel Valley, University City and Encinitas follow. Areas in East County rank at the bottom, given a general lack of local employment, unavailability of new housing, limited local attractions and a hotter climate.
The number-crunchers at the Meyers Group admit this ranking is highly subjective. They also give the nod to niche products, such as townhomes for move-down empty-nesters, and to some newly opened projects in San Ysidro and Otay Ranch. Entry-level housing is found mostly in the South Bay, such as at Casa del Rey by Fieldstone in San Ysidro, with single-family homes from $140,000. Centex, California Pacific and Cornerstone are also trying to stay under $200,000 in Chula Vista. Or in the other direction, across the Riverside County line in Temecula, houses by McMillin, Kaufman & Broad, Richmond American, UDC and Colrich range from $130,000 to $200,000.
And prices? Up, of course. But even though some prime properties are drawing asking-price-plus, “it doesn’t mean every house in San Diego went up last year,” says Dennehy. The median new-home price in 1997, countywide, was $238,000—up 11 percent from $214,900 in ’96. The median resale detached home was $179,500 in 1997, up from $170,000 in ’96. Only a 5.6 percent increase.
“But there’s no inventory,” Dennehy says. “Houses sell the same weekend they come on the market. If you have a clean house in a good location, with a fair price, it will sell immediately. In Mission Hills, under $400,000, there will be 20 people in line. In Solana Beach or Encinitas, they’ll line up for anything under $500,000.”
Why no inventory? For one thing, in a rising market, resalers hold on to their properties, hoping for a better price later. It’s still early in this rising phase. Perhaps they’ll sell at a moment closer to the peak.
For another, relatively few new houses have been built. Houses don’t just spring up like mushrooms. Builders complain that the entitlement process takes a very long time, especially in San Diego. By the time the builder owns the land he wants to develop, he is looking at anywhere from two to five years of red tape before he can shovel out the first forkful of dirt—two years for a small project, up to five for a large, master-planned community. The longer he goes out, the greater the risk. By the time his project is up and ready for sale, we could be in another recession.
Besides, there’s a scarcity of land, the real crisis in San Diego at the moment. But how can there be a land shortage when we see acres and acres of undeveloped land extending from 1-5 and other highways in every direction? The key word is “undeveloped.” Not zoned for residential. No infrastructure yet. Not applied for. Off limits. Untitled dirt.
So with new homes coming slowly on the market, and a sudden rush to buy whatever is available, prices go up. They’ve gone up anywhere from 15 to 20 percent along coastal North County in just the last year. There has been a 30 percent to 100 percent increase in the price of land.
Whatever happened to “affordable housing”? Where are the builders who focused on first-time buyers with limited budgets?
The recession carried many of them away —to Nevada and Arizona, states where the builders found less-restrictive processing requirements and lower fees. Any builder you talk to —whether in the luxury or affordable fields—complains about San Diego’s cumbersome processing rules.
“You fill out forms and then you fill them out again and you’re still at the beginning. It seems all they want to do is slow us down,” complains one developer.
“And there are the environmentalists. For every hillside they save,” says another, “they have added costs to the homebuyer. Eventually, the homebuyer is the one who will pay.”
Pardee used to be one of the top “affordable” homebuilders in the San Diego area. Pardee’s senior vice president, Mike Madigan, points today to his Ocean View Hills development in the South Bay, aimed at first-time buyers (and sold out), or two projects in Mira Mesa. “That’s always been one of the things we’ve done very well,” he says. But entry-level housing is scarce, and the demand is high.
Says Madigan, “People now have confidence in the economy, and it reflects itself in a willingness to make long-term investments.
“On the state level, people see that we’ve got a balanced budget, class-size reductions [in schools]—all things leading to the notion that California is working. It’s like a volcano that bursts through the surface of the ocean but has been building for a long time.”
And how long will it last? Will we now have seven years of plenty? Madigan makes no promises. “Housing doesn’t lead the economy; we respond to it,” he says.
Reassurances are hard to come by. Real affordability comes from attached housing—townhouses and condos. But with the construction-defect litigation that has plagued condominium builders of late, nobody seems willing to take another chance. The Building Industry Association storms Sacramento on a regular basis with pleas to be freed from some of the more onerous facets of legislation. “Why couldn’t guarantees be just for three years, instead of 10?” asks one builder. “Like cars. If you want a longer guarantee, you pay extra for it.”
“We’re trying to get our people—and ourselves—back into attached housing,” says Mark McMillin. But few builders want the liability. And apart from going south to Chula Vista or north to Temecula, attached housing may be the only way first-time buyers will ever get a foot in the housing market.
One bright spot is the mortgage market, where rates are the lowest in years. Thirty-year mortgages recently dropped to 6.99 percent; 15-year mortgages averaged 6.59 percent. On one-year adjustable mortgages, lenders are asking an average initial rate of 5.59 percent. Many builders offer package deals that include the services of an in-house mortgage broker, simplifying the procedure for the buyer. And in some cases, it saves money. McMillin, for instance, gives a financial incentive of $3,000 if you use their mortgage company.
The drop in lending rates is sometimes attributed to the Asian situation. The near-collapse of those economies has flooded the world with cheaper goods and held down our inflation, so Alan Greenspan, chairman of the Federal Reserve Board, will find fewer reasons to raise interest rates.
Since there will be pent-up demand through 1998, don’t expect home prices to get any lower. Developers will be building only a 10th as many attached units (condos, duplexes) as 10 years ago, thus further squeezing the first-time-buyer market.
According to the Meyers Group, new product offerings in the next year will be limited primarily to planned communities that have titled and readily developable lots available. The scramble for well-positioned lots will continue to put upward pressure on land prices in “hot” market areas—and push builders out to farther locations in search of land. This year, Temecula. Next year, the desert?