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HOW LONG CAN THIS GO ON?



Q & A;: Industry Leaders Assess the Current Residential Boom

The past few years have been very good to homebuilders, realtors and others associated with residential real estate. Strong home sales, a vibrant economy and continued price appreciation have led to record-level sales and price appreciation in Orange County. But how long can the good times last? The Business Journal set out to find that answer. Real estate writer Nidal Ibrahim asked several industry leaders, “How long do you see the current residential boom continuing and what are some trouble spots on the horizon?”

MICHAEL J. RAFFERTY

President

Hearthside Homes Inc.

I think it will continue as long as the stock market continues to perform the way it has been. There’s a major correction with the dot-coms, and I think we’ll see some slowing of the economy and that will affect the real estate market. When we talk to our buyers, they’re taking some of their value in the stock market and using that as down payment for houses. If there’s a major correction there, that will affect that.

I see the stock market, the affordability of new homes and the scarcity of land (as being possible trouble spots). I think if interest rates reach double digits, that could have a cooling effect on the housing market. As long as it stays below 10%, I don’t think people will give it a second thought.

ROLAND OSGOOD

Division President

Centex Homes

I don’t’ think we’re necessarily in a real estate boom right now. We were down from ’91 through ’95. If we had a boom, it was in ’97, ’98 and a little of ’99. I think it’s a healthy market right now.

(Concerns include) Greenspan and the Nasdaq. I mean, who knows? A lot of this is being fueled by the stock market. The margin requirement in the stock market is the highest in history, and that bothers me tremendously. That’s gambling; it’s not investing.

What if the Nasdaq (went down to) 3,000 tomorrow? I mean, think about it. And Greenspan is serious; he’s not kidding. What did he call it, “irrational exuberance?” (The Fed is) not going to let up on this thing.

This day-trading thing, it worries me because obviously it’s fueling what’s happening in the real estate market. People have made a lot of money, but I’m starting to feel a little more hesitation from people.

I’m more worried about the margin requirement than I am about interest rates right now.

WILLIAM COTE

Cot & #233; Realty Group

I anticipate that it will go on at least a couple more years before it levels out. All the signs are there for it to do that, for the following reasons:

n Continued pent-up demand to purchase;

n The cost of money is still reasonable so that as long as interest rates don’t go into double digits, we’re going to be fine;

n There’s not a whole lot of available product in the resale market;

n (Orange County) is still a very desirable place in which to live and people are still coming to this community.

Insofar as addressing some of the pitfalls, a couple of things could affect us:

n If the head of the Federal Reserve elects to raise prime interest rates so that it goes to double digits, that clearly will affect consumer confidence, and that’s really what the housing market is about;

n If the stock market would, for whatever reason become overnight bearish, which I don’t see happening because all the contact I have in the stock market are saying the bull will continue to run simply because there’s not enough stock out there.

Those are two things that affect consumer confidence in terms of the buying and selling public, especially the buying public. As long as you keep the confidence level up, the market will continue.

MARIANNE BROWNE

Vice President, Sales and Marketing

John Laing Homes

We see the current residential boom continuing for one to two years. Perhaps the main force driving this market is the symbiotic relationship between jobs and housing. As new homes enter the market it will be critical that they are in proximity to established employment centers as well as accessible to commuter highways and toll roads.

A potential trouble spot we see emerging is the diminishing quantity and the escalating cost of land available for builders to purchase and develop. These factors drive up new-home prices, in turn creating a more expensive real estate market. Gradually, rising prices,coupled with increasing interest rates,will limit people’s ability to buy new homes, especially as the prices increase in proportion to the median income. This situation inevitably produces a slowdown in the type of boom we are experiencing.

TOM POMEROY

President, California Division

Communities Southwest

I think (the residential boom will continue) out till 2005. It’s kind of where we see it. I think the trouble spots are going to be affordability and availability of lots.

MACKEY O’DONNELL

Principal

O’Donnell/Atkins Company

I feel real confident looking at the economy that we have a good three to five years easy here in the Southern California marketplace. I say that based on the fact that growth in jobs is so strong and everything points to continued overall growth in the economy.

In terms of warning signs, one obvious one is affordability, as (permit) fees continue to go up and costs of construction continue to go up, it can only be passed on to homebuyers to a certain point. Another thing is the lack of entitled properties. We’re already seeing shortfalls in Orange County and San Diego County and Los Angeles County, and the Inland Empire is going to have to make up the shortfall. But over the last several years, there really haven’t been that many developers entitling property and getting a good supply of lots ready to build.

Also, the interest rate is definitely a problem. If it continues to go up, it will have a negative effect. At this point, I would say they have not had a substantial a negative effect on housing, but we’re still at some historical lows in terms of where interest rates have been in the past and if (the Fed) continues to ratchet up, it will have an effect.

BOB SANTOS

President, Southern California Division,

Lennar Communities

My observation is that the length of the current residential boom in Orange County is directly tied to job growth in Orange County. I see job growth increasingly tied to the availability of affordable housing in Orange County as well as in the close-in commute areas of neighboring counties. If affordability continues to erode, due to “pitfalls” such as lack of affordable housing supply and increasing interest rates, for example, the current “boom” will begin to lose steam.

This is not to say that I foresee a recessionary period. Barring a major economic upset at the national level such as the tanking of the Nasdaq, the worst that I expect is a possible softening of residential sales momentum and, eventually, a stagnation of sales prices, except in the more premium locations.

PATRICK HAYES

General Manager

Talega

We have been closely tracking consumer demand for homes in the golf-oriented and ocean-close community of Talega and all signs point to an increasingly robust Orange County market. Not only do most of the official forecasts tell us this, but home shoppers themselves tell us this, as well.

Following our recent grand opening, our people here at Talega interviewed over 300 home shoppers about what is driving them to look for a new home. Particularly interesting were the high percentages of people who are actively looking. One third of Talega shoppers told us they plan on buying a new home within the next year. We consider these serious shoppers.

This simply validates what many of the marketing studies have already reported: That Orange County’s new home sales will experience a surge in 2000. While 1999 saw sales of about 7,500 new Orange County homes, the projection is for about 9,500 new homes to be sold in the county this year a dramatic increase. These figures are based on factors that include job growth, interest rates, resale volume and construction trends, all of which point to continued strong demand. Construction trends, in fact, only enhance the expected surge in sales, because the new housing supply is not expected to keep pace with demand.

But the real activity is here in southern Orange County.

LES WHITTLESEY

Whittlesey Doyle Real Estate Advisors/Land Brokers

Basically, I don’t see any major obstacles on the horizon. Our market is at a good equilibrium where demand is slightly greater than supply, allowing for continued price increases in houses without an uncontrolled inflationary spiral. Housing prices will continue to rise but at a more stable rate.

Nationally and locally, the economy is still good. There’s still a lot of consumer confidence. If there’s a major correction on Wall Street, that could hurt the upper end of the market. Otherwise, the only other things that can upset the apple cart is the entitlement process. The environmental hurdles that developers have to go through to get a property developed adds a tremendous cost to the price of the houses, which the consumer is ultimately burdened with.

J. TERENCE HANNA

California Regional President

Pulte Home Corporation

Since Orange County has established such a vital and dynamic employment base, strong housing demand will likely persist for the next few years. Contrasted with years past when a significant portion of commuters traveled beyond the area for work, thousands are now enjoying both living and working in Orange County. The area’s undeniable evolution in all aspects of development has not only enhanced the quality for residents in Orange County, but also necessitated a variety of housing communities. As a result, both demand and expectations will continue to rise as buyer preferences emerge.

Still, a number of industry challenges could hinder such housing growth. First and foremost is affordability. As available land becomes increasingly scarce, housing prices will rise accordingly and preclude a considerable buying market. The lack of sufficient high-density housing will further distance such markets and sustain the disparity in qualified homeowners. Other potential impediments to today’s thriving market may include increased government fees, development constraints by environmental interests, and prolonged improvements in infrastructure. Of course, interest rates provide a periodic deterrent to many home buyers, particularly the thriving move-up market.

CRAIG MANCHESTER

President

Western Pacific Housing

There are many factors which have contributed to the resurgence of values and the record pace of new product absorption throughout Orange County and in the Inland Empire. Certainly our current record low unemployment here in Orange County is a sustaining factor as is our emergence as a center, which rivals the Silicon Valley, for high-tech industries and as an international hub for bio-medicine.

Clearly our diverse and growing economy plays a huge role. But amidst what looks like good news on the surface is a simple and staggering truth, and that is that throughout Orange County there is a tremendous housing shortage and an ever-growing under-supply of new homes being permitted in comparison to the demand for housing.

This sustained long-term housing imbalance due to underproduction is one that will haunt us for years to come. And the more affordable the housing in question, the greater the imbalance. This is both a factor in our industry’s current boom, but also reason for serious pause and ultimately a real threat to our industry and our county’s economic health in the future. At its root is the fact that fewer than 39% of all the households in Orange County can afford to own their own home compared to the national average of 14%. That is a gap that our industry and our government leaders need to work hard to lessen and one that the public should demand as a priority.

We are currently enjoying nearly record lows in terms of long-term mortgage rates and much has been written about the new wealth created throughout the stock market and especially in the tech sector. Should interest rates rise sharply or should the recent instability in the stock market begin to erode equity capital, then the real estate market will undoubtedly feel those effects.

But demand is so strong and our economy overall so robust that I don’t foresee a free-fall effect at least from forecastable events. While no one can or should predict that the current boom will last indefinitely, we still see solid value out there for consumers, a continuing and hopefully increasing focus on in-fill redevelopment and rejuvenation that will certainly help with both housing affordability and equalized housing opportunities for all of Orange County.

For our part, we are going to continue to be diligent and aggressive in pursuing new opportunities and will continue our focus on value for the consumer to help insure an ongoing, appreciating but stable and increasingly accessible new housing market throughout this dynamic region of ours.

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