All indications are that home prices across the country are moving in a positive direction again, even in California, where prices in recent months have been recovering from some of the steepest drops in the nation during the recession.
But builders in the Golden State attribute any statewide price appreciation to bid-ups on foreclosed properties and resales. For new homes, it’s still very much a buyer’s market, they say, and is likely to remain so unless employment and credit conditions improve markedly.
Last week, the NAHB/Wells Fargo Housing Opportunity Index found that homes in California were less affordable in 16 of the state’s 28 metro areas. A median-income family could afford 62.7% of the new and existing homes sold in the second quarter of 2009, versus 64.4% in the first quarter. In San Diego County, only 56% of families could afford to buy a home in the second quarter.
DataQuick Information Systems, which tracks home sales throughout the state, estimates that the median price paid for a home inched up for the third consecutive month in July to $250,000, which the tracking service attributes to increases in purchases of more-expensive houses.
However, it does not appear that new homes have joined the party yet, with some spotty exceptions in places like the Bay Area and Sacramento, where prices had fallen off a cliff. Indeed, several builders contacted for this article say that while they are definitely seeing more buyer prospects, changes in their own prices have been minimal. “We’re selling more homes, and we’re seeing a higher conversion rate, but we have not been able to increase prices, although we have reduced our incentive dollars,” says Lora Heramb, vice president of sales and marketing for Brookfield Homes in Del Mar, Calif.
Heramb notes that price appreciation in the San Diego area is coming mainly from higher bids for foreclosed homes. “A house that was originally priced at $400,000, and has been put back on the market for $225,000, is getting 30 to 40 offers, all over the list price,” she observes.
It’s worth remembering, too, that any price increases are still a far cry from what builders fetched for their products during the last boom. Two years ago, the average selling price for RWR Homes in Van Nuys, Calif., was $1.2 million; now, it’s $800,000, says its president and CEO Bill Rheinschild. “We feel there’s price appreciation because people are making offers that are 40% of our original asking price.”
Rheinschild says his current selling prices are still below his construction costs, and he fears a “dead cat bounce,” where prices bump up but not enough for builders to realize any profits. He wonders where housing demand will come from when there are only a limited number of new buyers right now with FICO scores above 690 and the ability to put down 10% for a downpayment.
He points to the Riverside-San Bernardino area, which had been generating between 25,000 and 40,000 new jobs per year when the economy was stronger. Rheinschild estimates that two-fifths of that job growth came from a construction industry that is now dissipated and has left big projects hanging. His company has one site in that area into which it has invested $250 million. “But how can you build on those lots today when there’s no employment growth?”
C. Townley Larzelere, president of The Whitney Group, a housing consultant based in El Dorado Hills, Calif., says the fact that California has lost more than 800,000 jobs during the recession leads him to believe that the housing industry this time will not recover as strongly as it did from the state’s two previous recessions.
That being said, Larzelere is convinced that the industry is preparing for improvement. “It’s just less noticeable with new homes,” which he says usually trail existing home sales and pricing data by six months. He projects that prices for new homes over the next six months will go up only by between 3% and 5%, and points to one of his clients, Wathen-Castanos-Mazmanian, whose Ivy Gate at Harlan Ranch community in Clovis, Calif., increasing its average prices on its three products there by $5,000 in July to, respectively, $250,000, $265,000 and $286,000. The builder's partner Bob Mazmanian tells BUILDER that the increases didn't affect the community's absoption rate, which has been about seven sales per month since May.
Clovis is in Fresno County, where a staggering one in eight workers is currently unemployed. The Fresno Bee reported recently that the county’s home affordability hit a record high in June, when 78% of families there could afford an entry-level house. A year ago, that affordability rate was 62%.
Over the past year, McCaffrey Homes, which is based in Fresno, has seen a “slight increase” in its average selling price, which stands at around $300,000, according to Karen McCaffrey, the builder’s vice president. “Everyone is taking a cautious approach because there’s so much standing inventory” of existing homes and foreclosures.
Late last year, McCaffrey Homes introduced a series of smaller homes called Poet’s Crossing, which ranges from 1,350 to 2,500 square feet and starts in the high $100s. That series includes a unique three-story model, which started at $229,900, and proved to be “very popular,” says McCaffrey. “We’ve had a strong absorption rate on this series, and the models are now for sale.”
Larzelere suggests that McCaffrey Homes might be overcompensating at a time when house prices are starting to appreciate again. Nevertheless, McCaffrey Homes is now in the process of developing an even smaller series, which would range between 1,200 and 1,800 square feet. The builder hasn’t determined this series’ pricing yet, says McCaffrey.
It better hurry, because private builders could have only a narrow timeframe to re-establish their prices and product. Both Larzelere and Rheinschild say that public builders are swooping in on markets throughout the state to buy finished lots at bargain prices. That puts private builders at a decided disadvantage, says Rheinschild, when many private home building firms have already whittled their inventories to the bone, when credit to fund new construction projects is still tight, and when market conditions make it easier for municipalities and voters to block growth.
“The whole building industry [in California] is looking towards mid-2010 as the beginning of new life,” says Rheinschild. “But it’s still taking a minimum of 36 months to get lots approved, and another 18 months to get improvements OK'ed. So where will the new sellable inventory come from?”
John Caulfield is senior editor for BUILDER magazine.