The housing market ain’t what it used to be.
Orange County once was a sure thing for homebuilders.
The market’s heyday packed multiple benefits for them. In the past few years, they could raise home prices by $20,000 to $100,000 after just releasing one phase of homes at a development. New releases sold out in a matter of hours, after people camped out overnight to be first in line.
Builders had little need for marketing and none for brokers.
They even made more money by charging for interior extras, such as wood floors and granite countertops.
It all meant big earnings boosts, quarter after quarter, for public companies such as Irvine’s Standard Pacific Corp. and Newport Beach’s William Lyon Homes Inc. Other homebuilders operating here also reaped the benefits,big names such as Miami’s Lennar Corp. and Dallas’ Centex Corp.
But a couple of things have thrown cold water on the party: Developable land has dried up and some buyers are blushing at high prices, wary of the potentially negative consequences of higher interest rates.
Two years ago there were several thousand-home developments that kept builders busy. Talega and Ladera Ranch in South County were under way, and Amerige Heights in North County was going full steam.
But there are few big projects going up today as Ladera and Talega wind down.
The Irvine Company’s Woodbury project in Northern Sphere is sizeable, but it’s just getting started. The big projects,the rest of Irvine’s Northern Sphere, Rancho Mission Viejo in South County and redevelopment at the former El Toro Marine base,won’t be a factor for years.
So it’s not too shocking that after years of heady growth, the county’s biggest homebuilders reported a 25% decline in sales last year (see related story, page 22).
Now builders may have to wait a few weeks to sell a home. They aren’t raising prices as aggressively. Some are paying fees to brokers, once again. Others are throwing in free extras, such as steel appliances, to lure buyers.
As for sales of existing homes, some homes have been selling for less than their asking price. Homes don’t get multiple offers on the day they are listed anymore.
“Buyers got to a point where it wasn’t a value to them anymore,” said Michelle Wolkoys, managing director in the Costa Mesa office of Washington, D.C.-based Hanley-Wood LLC.
Still, it’s not all doom and gloom in OC.
Homebuilders still can be assured of selling a new home just about anywhere in the county at a price higher than last year and much higher than two or three years ago. It may take two or three weeks, but that’s a return to normal, sources said.
The problem for publicly traded builders is that they face constant pressure to grow sales and profits. In theory, stock prices are tied to tomorrow’s earnings, not yesterday’s.
The question then is how OC’s new market reality is set to impact their bottom line.
Both Standard Pacific and William Lyon sold fewer homes in OC in 2004 than the prior year.
In the fourth quarter Standard Pacific saw orders for homes drop 33% in Southern California to 363, versus a year ago. The company cited slower sales in Orange and San Diego counties as contributing to the decline.
William Lyon saw its orders for homes in California drop nearly 40% to 330 in the fourth quarter, versus a year earlier. The builder doesn’t break out its Southern California results.
The declines by both builders are due to more than a buyer pullback. Home sales can dip because builders have fewer projects open for sale at any given time.
Standard Pacific’s profits and sales rose in the fourth quarter, despite OC’s decline, because of strong sales in other markets. The builder has made some well-timed geographical expansions via acquisitions.
It’s growing its Florida and Arizona operations at a time when those markets still are selling well, or even improving. Phoenix is one of the hottest markets in the country today, while OC has cooled.
The picture is cloudier for William Lyon, which releases its next quarterly report in March. The company is heavily concentrated in California and sells in Las Vegas, another market on the decline.
During OC’s peak of late 2003 and early 2004, builders raised prices $20,000 on average between phase releases, according to Hanley’s Wolkoys. Phase releases generally are small, about 10 to 15 homes. Later phases tend to offer larger homes with more perks.
Nowadays price hikes between phases are more modest, in the $1,000 to $15,000 range, Wolkoys said. The average probably is about $5,000, she said.
Early last year homebuilders realized the market might be nearing a saturation point for price hikes, according to David Prolo, a senior vice president with John Laing Homes, part of Newport Beach’s WL Homes LLC. They began planning for it, he said.
“It was a good thing that we were ready,” Prolo said.
Slowing price hikes is one of several ways John Laing and others have adapted, he said. The company is building more condos here, which tend to be cheaper than a traditional house. The more affordable a home, the bigger the buyer pool, Prolo said.
John Laing sold condos last year at the former Tustin Marine base at the $500,000 level. That’s cheap for a new home in OC, where the median sale price countywide was $534,000 in January, according to La Jolla-based market tracker DataQuick Information Systems.
The builder has a mortgage division, as a joint venture with Calabasas-based Countrywide Financial Corp., which offers buyers a full spectrum of loans, including interest-only loans.
And John Laing weeds out buyers who have unrealistic expectations about what their home is worth, Prolo said. The company wants to avoid buyers dropping out of escrow because they can’t get a high enough price for their current home, he said.
Prolo is optimistic about 2005. But other sources said the future is anything but clear.
“I don’t anticipate that we will go backwards,” said Hanley’s Wolkoys about home prices. “We will be flat in some areas and we will see small appreciation in others.”
One problem with forecasting: No one knows for sure when and if mortgage rates will rise. Rates on a fixed-rate, 30-year loan tend to be closer to 5% than 6%,the lowest rates in a generation.
Rates on adjustable mortgage loans are much lower,at least initially,but stand to rise fast if rates rise quickly. Most loans in the past few years have been based on an adjustable rate.
The economic rebound is solid, though not spectacular. Whether the Federal Reserve Bank moves to quickly raise rates to fend off inflation is uncertain. It may be more likely that the Fed adjusts slowly, leading to higher interest rates but at a manageable pace.
One thing is certain: No one is poring over economic numbers more feverishly than homebuilders.
