Builders Say 1985 Will Be a Good Year : Optimism for Home Sales Fueled by Performance in 1984

Bullish for ’85. Cautious for ’86.

That’s generally how many Southern California home builders feel about the future, judging from comments accompanying the annual Los Angeles Times residential survey forms.

The optimism is fueled by a successful 1984.

As Donald B. Edwards, president of Malborough Development Corp., expressed it:

“1984 was the best year in Marlborough’s 32-year history in terms of sales volume and profit.”

Fourteen-year-old Pacific Scene Inc., based in San Diego, also posted a company record of closed sales of new homes throughout its operating regions.

And Irvine Pacific Development Co., a unit of the Irvine Co., recorded the highest home sales since it was formed 12 years ago with a 110% increase over 1983.

‘Better Than Expected’

Said Roland Osgood, president of the firm:

“We anticipated that the economic recovery was going to make 1984 an excellent year for the home-building industry, but our results were much better than we ever expected. Both our for-sale housing and apartment developments performed exceptionally well throughout the entire year.”

He attributed his firm’s 1984 performance to the resurgence of the first-time home buyer and apartment rental markets.

Double-digit inflation of the late ‘70s scared off many first-time buyers and put a damper on apartment construction, which is now apparently booming in parts of Southern California. In fact, it may be booming too much in the eastern part of San Bernardino County, where, one builder wrote, “there are huge numbers of syndicators looking for investments, and unless we have economic growth far beyond that of our most optimistic Chamber of Commerce members, these syndicators will overbuild the market with apartments.”

Several builders have also turned their attention to the first-time home buyer, and this is true even in Orange County, which has had a reputation for pricing out this market. As Randall W. Lewis, vice president and director of marketing for Lewis Homes of Upland, wrote:

“Builders in the Inland Empire cannot be complacent or ignore competition from Los Angeles and Orange counties. Orange County, especially the Irvine Co. under the guidance of Don Bren, has made some dramatic shifts in product types and marketing efforts that will have quite an effect on the commuter market. . . .

“One of the main themes for 1985 will be ‘The Empire Strikes Back,’ for that is exactly what is happening in Orange County. There will be a lot of product by some of the major land owners under $130,000, and it will be a real battle to see who can capture that share of the market.”

First-time Buyer

With an improvement in the economy, Irvine Pacific started focusing on both the apartment rental and first-time home buyer markets with an effort to build housing in Irvine at an acceptable price--$80,000 to $150,000 in the case of homes for sale.

However, sales were up in 1984 at an Irvine Pacific project where condominiums are priced from about $250,000, and during 1984, the firm’s parent, the Irvine Co., sold 12 custom home sites in Newport Beach from the mid-$250,000s to more than $1 million each.

“The luxury home market still exists,” Candy Shepard, Irvine Pacific director of sales and marketing, observed, “but it’s much smaller than it was before the recession hit in the early ‘80s.” So her firm will continue this year to put an emphasis on the first-time home-buyer market and apartment development.

D&S;, a Wrather subsidiary, has been concentrating on the first-time home buyer for 21 years, said Peter J. Sidlow, president of the firm, and it will continue in that role throughout 1985, which Sidlow views rather optimistically.

“Most people seem to think that the federal deficit, coupled with increased demand for dollars that accompanies a rapidly expanding economy, will cause interest rates to rise significantly in the final six months, but we do not concur, principally because we do not anticipate a particularly robust economy any time in 1985,” he said.

“Instead, we expect a pattern of continued modest economic growth. Consequently, we expect interest rates to stay relatively stable, close to current levels, and the economy to experience a very low rate of inflation.”

Absence of Inflation

If this proves correct, he looks forward to a good year for Southern California builders--”probably slightly better than 1984,” though he emphasized that it “will not be a great year, for one key reason: the absence of inflation.” Without inflation, he reasons, home shoppers are not as inspired to buy.

Walter E. Wolf, a San Diego developer who anticipated this year’s booming rental market by starting construction on more than 800 apartment units in San Diego County, had this point of view:

“If interest rates remain as temperate as predicted, home buying will be very healthy, just not as brisk.”

So much housing was built last year, he noted, “that home buyers now have more product from which to choose and they can be more selective.” Locations are also becoming more varied as in-fill sites--vacant or under-utilized lots near suburban and metropolitan centers--are apparently growing in popularity.

Randall Lewis wrote: “My guess is that the condo market, which has slowed down considerably in the past few years, will see some resurgence in these in-fill locations as more buyers decide not to fight the freeways.”

Another San Diego-based home builder--Tawfiq N. Khoury, chairman and founder of Pacific Scene Inc.--echoed Wolf’s sentiments by projecting another record year for Pacific Scene in new-home sales.

‘Strong National Economy’

However, Khoury conceded that the “strong national economy and a general spirit of optimism played major roles” in his firm’s success last year and cautioned that his forecast “carries with it the optimistic presumption that interest rates will remain reasonably stable and the economy strong.”

Harry L. Keiffer, president of A & K Developments Inc., wrote:

“Thank goodness 1984 had a few blooms on the bush for us smaller builders. Housing demand has been good and the softening of interest rates has been a big help.”

However, he added, “the S&Ls; and mortgage bankers still need to develop a better alternative to the fixed-rate mortgage that’s demanded by the home buyer instead of the Annual Percentage Rates that seem to do nothing but increase in payments.”

Keiffer also criticized the cities of Palmdale and Lancaster for “continuing to take the path of least resistance by front-loading the cost of community-wide improvements on the various new housing developments.”

“As developers,” he wrote, “we want a well-planned community with all the appropriate services and amenities, but feel that these added services should be desired by the majority of the citizens. They should be voted on and paid for on a communitywide basis instead of discriminating against the new homeowner and making him the only one subject to paying these fees.”

Tax Legislation

Concerns about tax legislation were also voiced but did not seem to dim prospects for the rest of this year.

Said James W. Oates and L. R. Schield Jr. of the Whitehawk Partnership:

“We are looking forward to a stable although not spectacular year for real estate. Since we build apartment projects to hold for income and appreciation, we do not feel that the proposed ‘tax simplification’ legislation will affect our plan to maintain equal proportions of income and for-sale units in our product mix.”

Said Randall Lewis:

“One of the biggest fears I have now is the disruption in the rental market that may come about if all of the Administration’s tax proposals are carried through. Proposed changes in depreciation allowances and preferential tax treatments would have the net effect of driving rents much higher on new construction, and if this comes about, it will quickly reopen the specter of rent control, which has not been that much of an issue in the past year.”

Lewis also indicated concern about interest rates, saying: “It seems that many builders are beginning to forget the depression that we have just come out of and are starting homes with very little concern for the inevitable upturn in rates. . . . One cannot be a builder without being an optimist, but a little restraint now will save a lot of bankruptcies and foreclosures when the next downturn comes.”

And Sidlow sees that next downturn coming in 1986, when he expects inflation to raise the cost of new homes “at a much greater rate than at any time during the past four years.”

“Builders that have forgotten that it is not prudent to build substantial inventory on speculation will be caught in a down cycle then,” he warned. “Housing remains a cyclical business, and only those builders who take prudent risks can survive over an extended period of time.”

Not Repeat Mistakes

Randall Lewis gave this advice: “We must be careful not to repeat the mistakes of the very recent past, and if we are careful and do a good job, 1985 will go down as a most successful year.”

Indeed, Ray J. Rutter, president of Cayman Development Co., wrote: “On the basis of the current unprecedented demand for homes now under construction, we anticipate that 1985 will prove to be a record-breaking year for our company.” He termed the firm’s deliveries in 1984 “limited.”

And Rick Doremus, president of EPAC Development (developer of Le Parc homes in Chino Hills, which won the Orange County Building Industry Assn.’s MAME Award last November and a Builder magazine Gold Nugget Merit Award) wrote; “While sales slowed between the Olympics and year-end, our absorptions since Christmas, coupled with the reduction in interest rates, point to 1985 as EPAC’s best year ever.”