Slow-Growth Measure Helping Builders Raise Prices, Experts Say
Some customers were stunned earlier this month when home builder William Lyon Co. raised the $178,000 price of some of its houses in a south Orange County subdivision by $18,000.
The increase came just after activists delivered 95,000 signatures to the registrar of voters, enough to get a slow-growth initiative before the voters as soon as the June primary election.
Lyon won’t say whether the two incidents are connected. But experts say builders are certain to use the initiative to justify raising prices still further.
“This is bound to allow builders to raise prices faster than they’d be able to otherwise,” said Mark L. Frazier, president of Irvine home builder Barratt American Inc.
And even at the higher prices, builders will probably find customers. Builders in Orange County are already asking--and getting--some of the highest housing prices in the nation.
The median price for all houses sold last year in the county hit $175,000, far higher than the $128,000 median for other large metropolitan areas, according to the U.S. League of Savings Institutions.
New homes in south Orange County are even more expensive: A recent survey found the average price of a single family home there to be $230,777 in the last three months of 1987, up 20% from the average $192,200 price tag in the fourth quarter of 1986.
“Every time somebody starts a new development at even higher prices, the industry holds its breath,” said S. Kelly McDermott, vice president at Market Profiles, a Costa Mesa consulting firm. “But the builders haven’t topped out of the market yet.”
Instead, the buyers keep coming. Five hundred people showed up to buy 24 houses at one of Taylor-Woodrow Homes’ subdivisions in Laguna Niguel, and the company had to hold a lottery to select the buyers.
Other home builders say buyers have camped out in front of the sales office for several days to buy a house.
“I’ve had people come in and try to bribe me to get a house so they can avoid the lottery,” said Gordon E. Tippell of Taylor-Woodrow, president of the Orange County Building Industry Assn.
At an upscale Barratt American subdivision in Laguna Niguel, 50 people have stopped by to see if the home builder had anything bigger--and more expensive--than the $390,000 homes it is building there.
So Barratt bought 22 more lots nearby and is planning to build even bigger homes priced up to $695,000.
“If we didn’t have the no-growth movement, the builders could screw up the demand by blowing their prices right by the buyers,” said Alfred Gobar, a Brea real estate consultant.
“But that’s not the case, and buyers are more willing to pay high prices when slow growth puts artificial restraints on supply.”
Added Incentive
Now buyers will have an added incentive: Fear that fewer homes will be available if the slow-growth initiative becomes law, or that homes will be for sale only at exorbitant prices.
It’s a sticky subject for home builders, some of whom acknowledge that the initiative is helping them raise prices. The building industry opposes the initiative, which home builders say is unworkable and would bring housing construction in the county to a screeching halt.
The initiative would slow development by tying new projects to the ability of roads, sewers and parks to handle the additional traffic generated by a project.
But when Orange County residents aren’t complaining about traffic, it seems as if they are out buying houses.
Sales of both new and resale homes stayed strong during the fourth quarter, which is normally a slow one for home sales, and sales are generally expected to stay healthy this year in Orange County despite expected declines in sales in the state and nation.
The 1,200 new homes sold in January in south Orange County--where most of the building is going on--hit a median price of $238,000. And it seems the sky’s the limit.
The people who are buying those houses, according to Barratt’s market research, don’t seem to mind the high prices. They tend to be affluent people who bought a home as many as 15 years ago in an upscale suburb such as Lake Forest, Anaheim Hills or Laguna Niguel.
Now they have a lot of equity built up in their house, interest rates are low and the strong resale market in the county allows them to sell their present house quickly and profitably.
Many of these people aren’t at all unhappy about the prospect of higher housing prices, according to opinion polls, since that means their own homes will appreciate rapidly.
“Our research shows a lot of people think that housing prices going up is a good thing,” said Mark Baldassare, a pollster and professor of social ecology at UC Irvine. Most of them probably already own houses, he said.
In a survey last year, 61% of Orange County residents questioned by Baldassare said the slow-growth initiative would have a “good effect” on housing, while only 21% said it would have a bad effect. Not surprisingly, two-thirds of Orange County’s families are already homeowners.
Meanwhile, many local builders are going after that large market, shifting from inexpensive homes for people who are buying a house for the first time, a market many builders say is nearly tapped out anyway. And it is a tough market to build for in Orange County since land costs are so high.
Now the thing is expensive homes for homeowners who want to “move up” from their old house to a larger or more lavish home, and builders are scrambling to outdo each other in the size and luxury of their product.
Consider these figures: In Laguna Niguel, one of the county’s most active housing markets, new houses priced over $200,000 composed 40% of homes sold in 1985, according to Market Profiles. Last year they composed 65% of homes sold.
Surveys show Orange County with one of the highest median incomes in the nation, but “there’s still a lot more income out there than we thought there was,” said McDermott of Market Profiles.
“There seems to have been a niche out there that nobody really suspected was there, and these people are still buying houses.”
So builders are making some very nice profits now, builders and consultants say.
But the cost of land has also risen dramatically--in some cases prices jumped 30% in the last six months--as builders rush to snap up a diminishing supply of land that has been granted government permits for home construction.
“On the projects we’ve got now, the profit margins are good because we acquired the land one or two years ago,” said Dale Stuard, president of the National Assn. of Home Builders and president of Signature Homes of El Toro, a builder of upscale housing.
Squeeze on Margins
“Now that land costs in some instances have risen 50%, that’s going to squeeze margins real hard.”
How long this demand for expensive housing continues is anybody’s guess, since jobs and population in the county are still growing. Much depends on interest rates staying low. Orange County home buyers start to consider dropping out of the market when mortgage rates go beyond 12.5%, according to Market Profiles.
The point where buyers get turned off is an even lower 10% in less affluent Riverside and San Bernardino counties, where many Orange County builders also build houses.
Meanwhile, prices trek upward.
“We’ve raised prices, but strictly based on the fact we’ve got far more customers than houses,” said Frazier of Barratt American. “And I think most developers are taking a little bit of advantage of what’s happening now, trying to improve their profit without gouging individuals.
“But this rate of price increases can’t go on forever.”
