Building Leaders Cite Lawsuits, Higher Costs : Immediate Outlook in California Appears Good, Followed by Uncertainty for Industry

The immediate outlook for California’s home builders--and home buyers--is fairly good, but the prospects for 1989 are less promising.

This cautious outlook appears to be shared by both large and small builders as the recovery that began more than five years ago increasingly matures, judging by remarks on questionnaires for the 17th annual Times Survey of Residential Construction and Sales Activity and by comments elicited from builders who preferred to let the numbers on the questionnaires speak for themselves.

A combination of escalating land costs and growth controls in an increasing number of cities are factors respondents cited in support of the feeling that a housing industry downturn may be near.

Sees Strong Year

Dick Randall, president of the William Lyon Co., Newport Beach, top-ranked firm for 1987, expects 1988 to be an extremely strong year, “especially in the Orange County market,” barring adoption of a controversial growth-control initiative in that important market.

Lyon is active in all of the markets in Orange County, including the Irvine Ranch, Mission Viejo and Rancho Santa Margarita, Randall said.

“Next year will be down somewhat from 1988, largely due to a slump in multifamily starts, but I don’t see a recession in 1989,” he added.

Alan I. Casden, president of third-ranked CoastFed Properties, Beverly Hills, expects the building slowdown to begin later this year as mortgage interest rates rise. He doesn’t expect a building crash--unless the inventory of unsold houses becomes excessive.

“Apartments could become overbuilt very quickly,” he said, adding that his firm’s 1,300-unit apartment development in Warner Center is renting very quickly.

Randall W. Lewis, senior vice president/director of marketing of Lewis Homes Management Corp., an affiliate of Lewis Homes of California, said that his firm had “record-breaking sales at almost all of our projects and our Southern California division, as a whole, had the best year in the history of Lewis Homes.

“The first weeks of 1988 have been great, and it appears that for those builders with land and houses, 1988 should be a fantastic year,” he said, adding that a combination of factors may lead to a downturn in 1989.

“The decline in (mortgage) interest rates as well as the health of the Southern California economy have combined to create a buyer enthusiasm equal to any we have seen since the boom days of the mid-1970s,” he added. Lewis Homes ranked fourth in the survey.

If there is a downturn, it shouldn’t arrive before late 1989 or early 1990 and it will probably be mild, predicted Ken Ramsey, president and chief executive officer of Watt Industries Inc., Santa Monica, the second-ranked builder. This year will be as good as 1987 and may even be better, depending on whether interest rates start edging up in the second half of this year, he said.

This year will be good for the 103rd-ranked firm, the Pacifica Corp., Westlake Village, but 1989 is “anybody’s guess,” according to President Jon B. Hedberg.

The major issue facing home builders is the slow-growth movement, not high interest rates or lack of demand for housing, Hedberg said, adding that the Building Industry Assn. of Ventura County is suing the city of Moorpark over its building permit allotment program. Hedberg is a past president of the BIA Ventura chapter.

“I’m a conservative when it comes to state control over building, but something has to be done to stop the flood of anti-growth legislation,” he said. “I’m wondering where my kids will be able to live when they leave home!”

Growth Control

Lewis agrees that the “specter” of growth control is the most pressing problem facing the home building industry. Slow-growth movements are spreading “like wildfire” throughout Southern California, and the issue must be handled at the state level, not at the city or county level, he said.

“We are approaching a situation where each locality is trying to pass different laws,” he said, adding that the consequences for neighboring cities and the region as a whole will be devasting in the wake of this piecemeal legislative approach.

James W. Oates, partner with L. R. Schield Jr. in the Whitehawk Partnership, Pasadena (the 76th-ranked firm), said Whitehawk looks to a very good 1988, thanks to having the “luxury of building our pre-sold product,” but is being very careful with land purchases and project starts into 1989.

“We do not wish to be dancing if the music stops and the chairs are filled,” he said. “It seems that many builders are sharing our caution, so we really don’t anticipate a large increase in unsold inventory like so many earlier market slowings have brought.”

Multifamily Housing Drop

Lending support to the view that a housing downturn is on the way are the latest housing production statistics from the Construction Industry Research Board: California housing production, as measured by new housing units in building permits, fell in January to its lowest level since December, 1984.

New housing was produced at a seasonally adjusted annual rate of 213,700 units in January, down 15.3% from December, and down 31.4% from January, 1987, according to Ben Bartolotto of the Burbank-based research unit.

However, Bartolotto added that the January decline occurred mainly in multifamily housing, which fell to the annual rate of only 66,300 units, the lowest pace since May, 1983’s annual rate of 64,600 units.

Single-family houses remain strong, with a January annual rate of 147,400 units, the highest since March, 1987’s 159,800 annual rate.

Tom Egerer of Tom Egerer Development Co., Manhattan Beach, the 169th-ranked firm, plans to build condominiums and apartments to supplement the high-end South Bay custom houses that have been his staple product.

At the other end of the sales volume scale, the Lewis firm has continued its efforts to diversify from its original orientation as a tract-home builder into non-residential construction.

Asian Buyers

Randall Lewis submitted four pages of comments, contrasted with the paragraph or two from builders who commented on the back of the questionnaire. Among the observations from a man who has spoken often on marketing of housing at many national and regional building conventions are the following:

--Asian buyers represent 50% to 70% of the total at some of the firm’s projects.

--The gap between new-home prices and resale home prices will widen “at a staggering pace” later this year and in 1989. “We have seen lot prices go up 30% in some cases in the last year, and while this has not yet been translated into big price increases, lots that have been purchased in the last three months will come on the market in the next six to 12 months at price levels that will be higher . . . than most home shoppers will expect.”

--Traditionally affordable areas, such as Rancho Cucamonga or Moreno Valley, will have virtually no new single-family detached houses priced under $110,000 in the second half of this year.

--The difficulties of finding building sites will result in many developers forsaking Southern California for alternative cities, including Sacramento, Las Vegas and Reno, “all of which are very susceptible to overbuilding.”

--Growth projections for California will turn out to have been “politically optimistic and politically naive. I am positive that Southern California will not grow at the rates predicted . . . (because) of lack of housing.”

--All in all, the position of young, first-time home buyers will be “bleak for 1989 and beyond . . . . Families starting out, that in the past might have rented for one or two years, will be forced to rent for five to seven years” before buying their first house.