On the surface, Orange County is a conundrum. The job situation is good, and there isn't an oversupply of homes. In fact, there aren't enough. So unlike many markets around the country, the supply-demand situation isn't out of whack.
PIER PRESSURE: Close proximity to such desirable attractions as the Huntington Beach Pier, shown here, contributes to inflated home prices throughout Orange County. Photo: Huntington Beach Conference and Visitors Bureau "Orange County has tons of job growth," says Tara Bleakley, vice president of custom consulting at Irvine, Calif.-based John Burns Real Estate Consulting. "We're not building enough houses. We never have been."

Yet sales have still plummeted. For the 12-month period ending in June, sales fell 21 percent to 3,779. "It's slower than what would typically be good business," Bleakley says. "When you think about the number of homes a builder needs to turn by community, we're way below where we should be for builders to be doing well."

So what's the problem? Even in affluent Orange County, where the median income pushes $90,000 per year, the large run up in home prices over the past few years has priced most residents out of the market. Hanley Wood Market Intelligence (HWMI) says the county's affordability ratio is less than 5 percent.

"There's not enough homes," says Michael Bobeczko, director of marketing for Sukut Construction, a grating contractor in Santa Ana, Calif. "The problem is that it has gotten too expensive, and people can't afford it. There is lots of demand, but not at the prices people are charging today."

Burdensome county requirements for both builders and homeowners, combined with high land costs and a lack of available land, have converged to create astronomical housing costs. Although home builders are making concessions in their product lines, land costs and prices will need to keep moving further down before Orange County is affordable again.

The Problem

When you think of high barriers to entry-level housing, Orange County has to be one of the first places that comes to mind. The county is shaped like a rectangle, the vast majority of which borders the Pacific Ocean. To the north lies Los Angeles County; to the northeast, San Bernardino County; to the east, Riverside County; and to the south, San Diego County.

"We don't have a lot of land here," says Jon E. Hughes, director of consulting for HWMI. "There are only a few areas of real significance. One will be El Toro when it is developed. [The Irvine Co.] also has stuff in Orange County, and there's Rancho Santa Margarita. After that, it's reuse of land, coming in and changing the zoning, and putting tracts of houses or condo projects where self storage used to be."

Anyone who wants to build in Orange County is faced with a simple supply-demand problem. The supply of land is low, which pushes the price of land through the roof. "They [home builders] bought land at high prices, knowing that they would have to sell at high prices," Bobeczko says.

In fact, high prices kept some big builders at bay. "We were being conservative and not buying a bunch of land because of the pricing," says James W. Boyd, Toll Brothers' California regional president. "It made it difficult to make things pencil out."

If land and construction prices didn't launch costs through the roof already, the fees enacted by localities push things even higher. In Orange County specifically, and throughout California in general, communities pile all kinds of requirements on builders. That only adds to the cost.

"California has very, very challenging environmental planning requirements," says Jeff Gault, CEO of Los Angeles-based LandCap Partners and a former KB Home executive. "The rules dramatically increase if you get into environmentally sensitive areas. They increase even more dramatically if you go along the coast."

Home buyers don't escape these charges either. In established neighborhoods, Hughes says Orange County residents may have tax rates of less than 1.1 percent. But in newer communities, which may be located in special assessment districts or Mello-Roos community facilities districts (CFDs), tax rates could rise up to 1.8 or 2 percent. CFDs are formed to finance major services or district improvements, including schools, libraries, roadwork, ambulance services, and police and fire protection. Mello-Roos taxes must be approved by a majority two-thirds vote within the district, are levied annually against property within the district, and are secured by a continuing lien.

"If you did a lateral move, it could triple property taxes," Hughes says. "And anything new has an HOA [homeowner's association] fee. That's adding an extra $100 to $400 a month."

Learn more about markets featured in this article: Los Angeles, CA, Riverside, CA.