These are heady days for Orange County homebuilders. But are they coming to an end?
Neither interest rate hikes, a shortage of finished lots or a tightening labor pool has slowed down Orange County’s 30 largest homebuilders, who managed to sell 6,674 homes last year, a 21% increase from the 5,497 homes sold in 1998, according to numbers provided by The Meyers Group, a real estate consulting firm.
Seventeen of the companies who made this year’s expanded list posted year-to-year sales increases, while 10 posted declines. Three firms,No. 25 Regis Homes LP, No. 26 Ryland Homes and No. 30 MBK Homes,had no Orange County sales in 1998.
Interestingly, most of the companies posting sales increases were toward the top of the list, while most of the firms reporting year-to-year declines tended to be toward the bottom. In recent years, the homebuilding industry has come to be dominated by large builders, most of whom are public, have easier and cheaper access to capital and tend to realize greater economies of scale with the large volumes of homes they build and sell. That trend is now being reflected in the Business Journal’s list.
The vibrant economy and sales pace has spurred builders to add 267 local jobs, a 10% increase from the 2,561 employees on their payroll in 1998. Fourteen of the homebuilders on the list added to their employment rolls, while eight saw their staffs shrink and eight were unchanged.
The strong growth posted in 1999 is a continuation of the residential boom that has seen homes sales explode and price appreciation recover most of the losses from the recessionary late 1980s and early 1990s. “We’re working our fannies off,” said an elated Roland Osgood, whose Centex Homes division posted a 147% increase in Orange County sales in 1999.
Reflecting the heightened activity, this year’s Business Journal list was expanded to 30 homebuilders, up from the 25 most active on last year’s. While the 30 homebuilders on this year’s list increased 1999 sales activity by 21% from their 1998 totals, a comparison of the 2000 top 25 vs. the 1999 top 25 shows a more moderate growth rate of 6%. On the employment side, jobs totaled 2,576, a 13% decline from the 2,964 total employed by the top 25 homebuilders from the 1999 list.
The three most active homebuilders in 1998 continue to lead the pack in 1999, with Lennar Homes of California, the Mission Viejo-based subsidiary of Miami-based Lennar Corp., repeating at No. 1. Lennar Homes sold 691 homes last year, a 7% increase from its 1998 total.
Kaufman & Broad’s Irvine-based division sold 608 homes in Orange County last year, a 57% increase over the previous year and good enough for the No. 2 rank on the list.
Both Lennar Homes and Kaufman & Broad, public homebuilders that have been active over the past several years acquiring other builders and shoring up their land inventories, continued their buying binge in 1999. Lennar acquired Greystone Homes, Polygon Communities, Renaissance Homes, West Venture Homes and Winncrest Homes. Kaufman & Broad acquired Lewis Homes, which had a growing presence in Orange County and has long been a dominant national builder, especially in the Inland Empire where the Upland-based homebuilder boasted one of the choicest land portfolios.
Osgood, whose Centex Homes was ranked No. 7 on the list with 424 homes sales, said the strong economy, desirable lifestyle and climate of OC continue to be the main drivers of growth in the homebuilding sector.
“People simply want to live here,” he said.
However, Osgood and other homebuilding executives sounded a cautionary note: The continued rise in interest rates, home-price hikes, a shortage of labor and especially the diminishing number of ready-to-build lots will lead inevitably to a slowdown in the pace of Orange County new homes sales.
“Orange County is a very difficult (place) to acquire land,” said Osgood, whose company has benefited from a land portfolio aggressively acquired in the mid-1990s.
“We went from 47% affordability to 28% (in Orange County in 1999). That’s a warning sign, and it worries me deeply.”
The diminished availability of lots has led to substantial increases in the costs of acquiring ready-to-build land. Osgood believes any homebuilder buying Orange County lots today must turn around and sell homes priced from the $400,000 range in order for any deal to make financial sense for the builder.
As a result, Osgood sees his company maintaining its aggressive building pace in Orange County only for a couple of more years as it works through its portfolio. Most of his firm’s activity beyond that, he said, will be focused on the western portion of the Inland Empire, in cities such as Chino Hills, Chino, Ontario and Corona.
Similarly, No. 16 Hearthside Homes will shift activity away from Orange County to other outlying areas, mostly a result of the lack of ready-to-build land, said Michael J. Rafferty, president of the Irvine-based homebuilder, which had 142 Orange County sales last year, a decline of 46% from 1998 sales.
Rafferty, whose company has so far been stymied in its efforts to develop its Bolsa Chica assets in Huntington Beach, attributed the decline to the completion of Orange County projects and a shifting of assets to the Inland Empire and San Diego County.
“We are focusing on (getting the necessary permits for) Bolsa Chica and are doing some projects outside of Orange County right now,” he said.”
Hearthside Homes is working on launching a 112-unit community in San Diego County and is close to acquiring 86 golf-course lots in the masterplanned community of Chapman Heights in Yucaipa. Still, Orange County remains very much in the company’s plans, he said.
“We know if we get Bolsa Chica entitled it’s going to be a home run,” Rafferty said. “We were very close to doing a project in Talega and that didn’t work out in ’99, so we’re hoping to put our hat in the ring for second- or third-phase project there.” n
