William Mellerup, vice president of community development for Lewis Planned Communities, has more than 2,300 homes planned for this Fairfield site.

William Mellerup, vice president of community development for Lewis Planned Communities, has more than 2,300 homes planned for this Fairfield site.

Home in the Range

What will housing inventory hold when Solano rebounds?

Back Article Aug 1, 2009 By Adam Weintraub

The new-home market in Solano County soared even higher than that of California as a whole, and it fell harder too.

As things settle into a bumpy unease — which builders hope represents the bottom of the market — Solano’s location and available land leave it with opportunity when the market recovers.

But industry analysts and insiders say new development will be slow to revive, and homes priced for first-time buyers may be especially scarce unless local governments cut or restructure fees for infrastructure. Those rates soared as the housing bubble drove home prices up, and builders and planners say fees must now come back into line with sharply lower prices.

“Solano County is not immune to any of the things that are going on in the country as a whole or across Northern California,” says William Mellerup, vice president of community development for Lewis Planned Communities. The company is planning more than 2,300 homes in Fairfield and 2,200 in Rio Vista, but Mellerup says it will have to change its original approach to cope with tighter credit, high development fees, lower prices and the uncertain economy.

Still, he says, Solano’s fundamentals are essentially sound, and development should resume once things settle down. “We take a long-range view of things, and these are medium- to short-range problems.”

Solano is close enough to the San Francisco Bay to make it a reasonable choice for commuters. It has enough vacant land that buyers can afford a new single-family home, but closer to the urban core they would have to buy an attached new home or an older home.

As easy financing began driving up prices, Solano saw the traditional relationship between household income and home prices break down, to an even greater extent than it did across the state. From late 1999 through late 2003, a new home in Solano cost roughly 6.2 times the median household income in the county. From 2004 through 2008, that average reached 9.9 times household income, and the price peaked during 2006 at 12 times the average income.

In the Sacramento area, by contrast, homes that had been going for about 4.5 times the income peaked at roughly nine times the income, says Tim Youmans, managing principal at Economic & Planning Systems Inc. of Sacramento, which worked with new-home market analyst The Gregory Group on a study for the Solano Economic Development Corp.

Then the bottom fell out. From the peak of 2,755 new-home sales in 2004, sales volume plunged to 604 in 2008 in Solano County, down 78.1 percent, according to The Gregory Group. That compares with a 72.6 percent decline in the four-county Sacramento metro area, from 17,155 in 2004 to 4,695 last year.

From mid-2006 to early this year, the average net price of a new home in Solano fell 36.2 percent to less than $500,000, according to The Gregory Group. The median sale price of a resale home plunged 62 percent, from $476,000 to $180,000, according to the California Association of Realtors.

The slowdown continued in early 2009. Solano netted 122 new-home sales from January through April, down 51 percent from the same four months of 2008, according to Hanley Wood Market Intelligence. Only nine were condos and six were townhomes or half-plexes. None of the 122 exceeded 4,000 square feet; nearly half were in the 1,500- to 2,500-square-foot range.

“Today it’s a challenge to buy at all,” says Greg Paquin, president of The Gregory Group. “The trend now is that we’re going back to more traditional home and lot sizes” in Solano subdivisions. “I think the market is bottoming this year; we’ll probably see sales increasing next year and prices after that.”

But without the flood of cheap financing, don’t look for the steep appreciation in prices we saw early this decade, Youmans says. “While there might be an expectation of volume returning to those levels of 2005 and 2006, we don’t expect prices will return,” he says.

Home prices are coming back to their typical relationship to incomes, but development costs are still out of balance, Youmans says. Cities and other local governments that increased fees when home prices shot up have been slow to ratchet them down in most cases. That’s led the development industry to push for relief. Developers argue that at today’s lower home prices, the current fees could eat up all the profits in an entry-level home, making development of such properties impossible until prices rise again.

Woodland and Elk Grove have agreed to lower fees, Youmans said in June, while Fairfield, Rio Vista, Sacramento, Folsom and others were considering reductions.

Youmans says revisions could come through dropping some fees, such as for indoor swimming pools or other amenities, or by changing the ways they’re calculated.

State tax laws under Proposition 13 make it impossible to base fees on property value, he says, but a flat fee for streets could be revised so it’s based on people per household, charging more for homes that generate more traffic.

“Until those (development costs) get back in balance, you won’t see a lot of green-field development of master-planned communities,” Mellerup says.

And the ones that are built may go up in smaller phases, he says, at least in part because tighter credit means developers can’t spend as much money upfront to make all the infrastructure improvements at once. “With the way financing is now, that’s not going to work,” he says. “I can’t do it the old way. We’re going to have to work together to find a way to work in this new world.”

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