Builders Concerned About Higher Interest and Possible Recession

Times Staff Writer

The prospects for higher interest rates, a possible recession and skyrocketing land prices were the top concerns of the 194 home builders who took part in The Times’ 18th annual survey of residential construction in Southern California.

Despite such concerns, respondents expect to sell 29.2% more homes in 1989 than they did last year. Some said the projected increase reflects the huge number of housing tracts that were begun in previous years and only now are being completed.

“We hope that (1989) will still be healthy for us, but we don’t foresee another year of camp-outs for $500,000 homes as we saw in 1987 and 1988,” said Jim Oates, co-owner of Whitehawk Partnership, the Pasadena-based builder that ranked No. 57 the list. Several builders said they are afraid that higher interest rates will dampen home sales this year and next, and a few said a recession could hit within a year or so. As a result, many builders are scaling back this year’s production.

For example, Tom Egerer Development Co. plans to build just 26 new homes this year, down from 68 in 1988.


“My company is going to back off a little in 1989,” said Tom Egerer, president of the Manhattan Beach-based company that ranked No. 142 on the list. “This year might stay strong but 1990 really makes me worry.

“We have had a great five-year run, but I personally feel something bad is lurking around the corner.”

Egerer’s major fear--and that of most other respondents--is that interest rates will move higher. Rates have been trending upward for several months, and many economists and builders say they will keep rising until at least midsummer.

Profits of companies that build only single-family homes typically drop sharply when interest rates rise or a recession sets in, because either one forces many would-be buyers to delay their purchasing plans.


Diversifying for Protection

Many builders said they’re diversifying into apartment and commercial construction to reduce their exposure to the highly cyclical business of building single-family homes.

For example, No. 59, Weston Development Corp. of Los Angeles plans to build 100 apartment units and about 80,000 square feet of retail space this year in addition to 134 for-sale homes.

“When interest rates start going up, the single-family home market usually gets hit first,” said Bob Jones, Weston’s vice president of marketing, in a telephone interview.

“Having residential and commercial income property in our portfolio helps to smooth out our cash flow: We will still collect rent payments even if revenue for our home sales drop.”

High Cost of Land

Several builders also complained about the fast-rising prices of buildable land. An acre of land in some parts of Orange County now fetches about $1 million, up from $350,000 to $500,000 a few years ago. Prices are also surging in the Inland Empire, an area once popular among builders who had been priced out of markets to the west.

Builders said they’re coping with higher land costs through a variety of methods. Many are building more expensive homes with upgraded features, hoping that the higher prices will boost their bottom line.


Others report that they’re building more homes on every acre.

“Builders are now working on detached home densities of nine to 12 (units) an acre and are working on townhome densities . . . in the 18 to 20 per acre range,” wrote Randall W. Lewis, executive vice president of No. 3, Lewis Homes.

Buyers Are Compromising

Such densities, Lewis said, “were virtually unknown just a few years ago.”

Higher home prices have forced many buyers to make compromises, builders said.

Those seeking homes close to their jobs “are being forced to choose neighborhoods that they might not have considered desirable just two to three years ago, and they are accepting product types such as duplexes, townhomes and stacked flats which they also might not have accepted three years ago,” Lewis wrote.

Not all buyers had to make such sacrifices.

“1988 marked the return of the investor and, in a few cases, the speculator,” said Lewis. “We have been surprised at the number of our buyers who were using single-family housing as a place to invest instead of the stock market.”


Lewis said many buyers have been making down payments of 50% or more. “I think this shows that people feel their home will probably out-perform any other place they can put their money,” he said.