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Thursday, May 17, 2012
Feature: March 2007
On the horizon
The worst is over, say experts, but what’s ahead?
Story by Jeff Hudson
After several years in which the market had so much momentum it was virtually airborne, the real estate industry got its feet back on the ground in 2006.
The pace of construction for new homes in the Capital Region slowed dramatically, and prices came down a bit — more in some neighborhoods than in others — as builders offered incentives, out-of-town investors began selling their assets and moving on, and ordinary homeowners realized the five-year spree of double-digit equity gains that have financed many a kitchen remodel around town had come to an end.
It was a market correction, a transition from a feeding frenzy to what’s widely described as a buyers’ market. Optimists spoke of a soft landing, citing the area’s steady employment figures and the expectation that tens of thousands of new residents will move into the region in the decade to come. Pessimists, on the other hand, warned of a bubble bursting.
Twelve months on, the picture is getting clearer. “As we went into 2006, there was a lot of uncertainty about ‘How bad is it going to be?’ and ‘How much will things go down?’” says Leslie Appleton-Young, chief economist with the California Association of Realtors. “While we recognized that the frenetic sales pace of the past four years could not continue indefinitely, the market in 2006 did not fare as well as we initially expected.
“A year later, there is more optimism,” Appleton-Young continues. “We have an economy that continues to grow at a modest pace. The mortgage environment is more attractive than a year ago. Inventories are pulling back a little, though they’re still well above what they were a year ago.” Mostly, Appleton-Young says, “there’s a sense that the worst is over.”
John Orr, president of the North State Building Industry Association, which tracks residential construction and sales in the Capital Region, acknowledges that 2006 was “a challenging year for homebuilders” due to “about a 45 percent decline in new home construction. The slowdown in home sales has certainly caused some personnel changes in the industry and some downsizing among homebuilders and other companies that are related to homebuilding. It’s certainly a market that has changed dramatically toward favoring the homebuyer as compared to a year or two ago.”
But Orr says it doesn’t look like a replay of the early 1990s, when the market cooled — and stayed cool — for about four years. He says he’s hearing from some of the association’s membership “that the second half of 2007 will see a modest pickup, with stronger activity in 2008. A lot of factors will influence that. If interest rates stay down, and if we continue to see good employment, we ought to come out of this thing sooner rather than later. But we don’t expect any sudden rise.
“Historically low interest rates and a strong job market made 2006 an ideal year for many new homebuyers,” Orr wrote in his December forecast. “A modest recovery in the housing market is anticipated [for 2007], and new home sales may have already bottomed out.”
Orr added that “Those who are waiting for further price drops and higher incentives would be well advised to consider moving towards the purchase of a new home now and not gamble on the strong buyers’ market continuing.”
The California Building Industry Association forecasts a homebuilding climate that will be “steady at best in 2007 ... Last year, we said, ‘It’s time for a breather.’ We’re saying it again.
“The first quarter should be unusually slow as builders further reduce their inventories. Once those inventories are back in balance, the need for concessions [to buyers] will decline.
“A new mentality is necessary for California homebuilders,” the CBIA continued. “Actually, it’s an old mentality, going back to 2001 and 2002 before the craziness hit. In the late 1990s, total units permitted averaged 107,000 [for single-family units statewide]. Then, from 2000 to 2002, it crept upwards to 150,000 units, and between 2003 and 2005, reached 200,000 units. That type of massive increase bent the industry out of shape. It caused lot and land prices to wildly accelerate, material and labor costs to skyrocket, and trade contractors to throw away their standard profit-measurement tools.
“Now, in 2007, we’re heading back to some form of normalcy,” the CBIA said. The association is expecting 110,000 to 120,000 new single-family homes in California this year.
That switch to “normalcy” will be reflected in the Sacramento region, according to the CBIA forecast. “The single-family market in Sacramento was typically a 10,000- to 15,000-unit market. From 2002 through 2004, the market exploded, permitting 18,000 units in each of the three years. Then, in 2006, having largely exhausted its buyer base, permits nosedived to the 10,000-unit level. We anticipate that in 2007 the market will recover modestly, and the permit count could well rise to the 10,000 to 12,000 range.”
Further, “there will be a reduction in land prices in most metropolitan areas,” the CBIA predicted, which should allow “opportunities for smaller builders to obtain land at prices that are almost palatable, both in the suburban and urban areas.”
The California Association of Realtors predicts “the median home price in California will decline 2 percent in 2007.”
“The housing market clearly downshifted in 2006 from the record-setting sales and robust price gains of the last few years,” says CAR President Vince Malta. He predicts “the psychology of the market — matching the differing expectations of sellers and buyers — will continue to be a factor as realtors help consumers navigate their way through a changing market.”
Malta also points out that “over the long term, residential real estate in California has been and will continue to be a solid investment. Since 1968, the long-term average price appreciation is 9.1 percent annually.”
The University of the Pacific’s Eberhardt School of Business, in its annual economic forecast issued in December, declared, “The housing soufflé has gone cold, but it still has not collapsed. [In 2007], housing starts [will] fall to their lowest level since 2001. Excess inventory will cause developers to delay or reduce plans for new home building, but the decline will be short-lived, and starts [should] resume an upward trend in 2008 and 2009.
“Housing prices will continue to decline until the excess inventory can be worked down,” the Eberhardt forecast continued. “Current worse-case scenarios for some areas put declines in the range of 10 to 20 percent [below the market peak]. A bubble bursting? Hardly. If NASDAQ had fallen 10 to 20 percent in 2001 from its high point, would we still refer to it as the dot-com bubble?”
The National Association of Realtors, in its analysis of the Sacramento region, concluded that “after five straight years of double-digit gains, including a whopping 27 percent one-year appreciation in 2004,” Sacramento is now experiencing a “slowdown ... [with] a recent, sharp cut-back in new home building.”
But the report also pointed out that “the local unemployment rate of 4.7 percent implies full employment,” and “the three-year job growth of 5.8 percent is more than two times as fast as the national pace.” In addition, “the percentage of [Sacramento] homebuyers who utilized sub-prime mortgages was much lower in the region than it was for the nation as a whole,” suggesting that most homebuyers can ride out the turbulence.
So in this new market environment, different in many ways from the market that existed just two years ago, what’s hot and what’s not?
There are several ways to answer that question, depending on factors like geography, home price and what kind of home — or buyer — you are talking about.
In the new home market, it’s clear that, for a growing number of buyers, small is beautiful.
According to housing industry consultant Greg Paquin of Folsom, attached homes — condos, townhouses and the like — accounted for just two development projects, with a total of 129 homes sold, in 2002, representing 0.9 percent of total new home sales in the region.
In 2006, attached homes surged to 62 projects with a total of 2,321 homes, representing 24.2 percent of new home sales in Sacramento.
Small-lot detached homes are also a more substantial growing market segment. In 2002, they accounted for 24 projects with total sales of 423 homes, or a mere 2.3 percent of the total new home market in Sacramento. In 2006, they represented 45 projects, 1,454 homes sold, and a more substantial 15.2 percent of the market.
Several things are driving this trend toward smaller new homes: they’re less expensive; they’re often built as infill projects, closer to a downtown area and transit, in many cases offering buyers a shorter commute; and they tend to appeal to both younger, first-time buyers as well as older, empty-nest buyers looking to downsize now that the kids are on their own.
Local municipalities, spurred by the regional planning document known as the Blueprint, are also encouraging homebuilders to propose more attached and small detached units, with a one- or two-car garage, as a means of limiting sprawl and providing a broader mix of housing opportunities in a region that has lots of regular-sized and large single-family homes.
Kerrin West of Folsom is a local architect who’s come to specialize in designing smaller homes that feel like something bigger. West designed what have come to be known as Pull-a-Part townhomes. She got the idea over dinner a few years ago.
“I was at Thanksgiving with family, pulling apart a pan of rolls, the kind that come attached, and I thought ‘What if we pulled apart our attached product in such a way that we could get higher density but still be detached?’”
West, who is partner in charge at the Folsom office of BSB Design, kept thinking about those dinner rolls — and how townhomes might be similarly detached.
Homes based on West’s Pull-a-Part design are now on sale in Natomas as Beazer’s Discovery Collection, and are also in upcoming developments in Elk Grove as well as San Joaquin Valley communities like Ceres and Riverbank.
“It’s a real blend between multifamily homes and a detached home,” West says. “It’s got the benefits of both of those lifestyles, allowing for real home ownership without a party wall,” which gives people more privacy.
At the same time, the Pull-a-Part homes tend to be less expensive than standard single-family designs because they’re on a smaller lot. “You are still talking about densities that are comparable to townhome living,” West says. Floor plans in the Natomas homes range from just over 1,000 square feet to nearly 2,000 square feet; prices in that project start around $250,000 for the smaller units and around $335,000 for larger units.
“I could see my family living in one of these homes, without a doubt,” says West, who’s married and has a 6-year-old. “If I were a single professional who didn’t want a yard, I could live there in an instant,” she adds.
John Orr of the North State Building Industry Association agrees that “there seems to be a lot of interest on the part of younger people in particular in moving into an attached or smaller detached product that’s less expensive. And older buyers, who are attracted to a downtown environment as they look at downsizing … they can pull equity out of their house. In many cases that house is paid for.”
What else is hot in the new home market? Incentives offered by builders in an effort to reduce their inventory. Sometimes the asking price is reduced. Other times, the builder includes amenities that might have been add-on costs a couple of years ago: backyard landscaping, marble or granite countertops in the kitchen and bathrooms, or a hot tub or swimming pool. “I’ve even seen a couple of instances where a new car has been thrown into a deal,” says Orr.
What’s not hot? “Investors have pretty much dried up,” says Orr. Those investors were said to account for 10 to 20 percent of home purchases in the region a few years ago, when home prices were rising at a rate of 20 to 27 percent in a single year. With prices flat or dropping in most parts of the Capital Region, they’ve moved on. Many have reportedly switched back to the stock market, which found new vigor in the closing months of 2006.
Newfangled mortgages — including interest-only loans — have also largely disappeared, for both new and existing homes.
Michael Lyon, president of Lyon Real Estate, recently surveyed the existing home market and cited a significantly higher number of homes on the market, declining numbers of homes sold, and a declining price per square foot in most neighborhoods.
Lyon rated the existing home market for Sacramento, Placer, Yolo and El Dorado as a buyers’ market. “We will experience up to a 10 percent drop in values for most of the region in 2007” he says, but “there will be exceptions where inventory is very low.
“Strong job creation and increases in income will be the key to a real estate recovery by 2008 — but do not expect prices to increase as fast as they did from 2000 to 2005.”
