Housing Forecast: 1988 Starts Down, but Far from Out

The 65,000 home builders and related professionals wrapping up their annual convention in Dallas this week are probably getting tired of the refrain they’ve been hearing from economists nearly every year since 1984:

“This will be a good year for housing, but not as good as the last one.”

Forecasters for the National Assn. of Home Builders predict that housing starts will decline about 9% this year to 1.49 million units as interest rates rise around summertime and overbuilding in many parts of the nation discourages new housing projects.

In California, which accounts for nearly 20% of all homes built in the United States each year, starts are expected to decline an identical 9%.

Although 1.49 million housing starts is considered a fairly healthy number, it would be the fourth time in five years that housing starts have dropped. But this year’s projected decline makes a handful of the nation’s economists particularly worried.

Potential for a Dent

They claim the country is already teetering on the brink of recession and a bigger-than-expected plunge in housing starts could be the straw that breaks the economy’s back.

And although the projected 9% drop in California’s housing starts is not expected to wreck its diverse economy, it clearly has the potential to put a big dent in it.

The state’s booming construction industry provided jobs for a record 561,000 workers last year, according to the Associated General Contractors Assn. of California. But outlays for new residential and commercial projects in the state are expected to drop 7.8% in 1988, meaning that tens of thousands of employees may be thrown out of work.

According to the contractors’ group, about half of all the state’s construction jobs are in four Southern California counties--Los Angeles, Riverside, San Bernardino and San Diego.

Government Outlays

But the negative economic impact a downturn in the housing market would have on the Southland’s economy is expected to be at least partially offset by the strong commercial and industrial segment, where employment has been buoyed by massive government outlays for the ongoing Century Freeway and Metro Rail projects.

The expected decline in housing starts might help many buyers. Some developers are already offering low-interest loans or free upgrades to bolster sales, and that trend will continue if homes get harder to sell.

In addition, last October’s stock market crash has put downward pressure on interest rates. Cost increases for labor, land and supplies are also moderating, said Bruce Karatz, president of Los Angeles-based Kaufman & Broad Home Corp., one of the state’s biggest home builders.

“Builders’ costs won’t go up as much this year, and that means prices of the homes themselves probably won’t go up much,” Karatz said. “Interest rates are down and our economy is stable.

Remain Optimistic

“All in all, I see a lot more positive signs than I do negative ones.”

Indeed, despite some dark clouds looming on the horizon, most California home builders remain optimistic about the year ahead.

Builders in the fast-growing Riverside/San Bernardino area and northern Los Angeles County are confident that buyers will keep streaming into their markets, where new single-family homes can still be purchased for under $100,000.

Although first-time buyers are expected to continue driving the county’s northern market and inland areas, another type of buyer--the “first-time trade-up”--will play an increasingly important role in 1988 and the years ahead.

“A lot of people first moved up here four or five years ago so they could buy their first home, but now they’re ready for a larger, nicer house,” said Herb Hirsh, partner in Lancaster-based Cambridge Development Group. “They’re ‘trading up’ for the first time.”

To fill these buyers’ needs, Hirsh and other builders have begun building some slightly bigger houses in outlying areas. For example, one development Cambridge plans to open later this year in nearby Quartz Hill will have larger rooms, fancier fixtures and three-car garages. Prices will range from $120,000 to $140,000.

“Those prices sound ridiculously low to people who live in Los Angeles or Orange County,” said Hirsh. “But up here, those kinds of prices were unheard of just a few years ago.”

In more populous areas, much of this year’s residential construction will be “in-fill” projects squeezed between existing structures or projects that call for the demolition of low-density housing for higher-density apartments or condominiums, experts say.

Soaring Land Prices

The trend toward greater use of in-fill sites is being fueled by the scarcity of buildable lots in the cities, soaring land prices and the growing number of people who are fed up with long commutes to and from their jobs, said Dennis Macheski, principal planner for the nonprofit Southern California Assn. of Governments.

But while living fairly close to downtown areas is convenient, it can also be costly.

For instance, Prestige Homes recently began two projects not far from the downtown area--a 28-story condominium tower in Westwood, where units start at $500,000, and another development in swank Bel-Air, where homes will start at $550,000.

Lots with city and ocean views at the Bel-Air site will command as much as $1 million--and that’s for nothing but the dirt.

Plans to Diversify

“Upper-income buyers want quality, and they don’t want to drive too far to work,” said Bruce Froehlich, Prestige’s director of housing. “We’re going to give them both.”

Many home builders this year say they’ll step up efforts to diversify into other lines of business.

Westwood-based Weston Communities, for example, will break ground later this year on its first commercial development in Oxnard. The company has been active in the area for several years, but only in residential construction.

“We want to do more commercial development because it tends to follow different cycles than the housing industry,” said Bob Jones, Weston’s vice president. “It’ll also smooth out our revenue flow--we won’t be as susceptible to boom-and-bust cycles.”

Although some builders think price increases for land will moderate this year, others aren’t so sure.

“Finding well-located land at an affordable price will remain our biggest concern,” said Elliot Light, a vice president at Tustin-based Gfeller Development Co. “People are spending enormous amounts for land, and we just don’t think the prices are justified.”

Light said the fast-rising prices being paid for acreage in some parts of the Southland are “unfortunately similar” to another escalation that began in the inflationary days of the late ‘70s and climaxed in 1980.

One year after prices topped out, interest rates soared and the nation plunged into a deep recession. Some builders lost millions of dollars as the bottom fell out of the housing market and many banks had to foreclose on the parcels.

Slow-Growth Movement

Prices for buildable acreage have been rising steadily for several years, and some experts say the spreading slow-growth movement is pushing values even higher by creating an “artificial” shortage of acreage.

The burgeoning slow-growth movement is expected to be as big an issue this year as it was in 1987, or maybe even bigger. Last November, 17 growth-control measures appeared on ballots across the state; a stunning 15 of them passed.

“We have seen only the bare beginning of the politicizing of real estate development,” San Diego-based real estate consultant Sanford Goodkin said recently.