May Combat Risk by Moving Into Other Areas : S.D. Developers Fear Market May Slip
Building houses outside San Diego County is something Bill Fontana and Wes Mudge hoped never to do when they formed Westana Builders/Developers in 1980. But the rising cost--and risk--of home building is making such a move practically inevitable, they say.
Their main objective in forming Westana was to stay local and to avoid the management responsibilities, the airplane travel and the delegation of duties attendant to their former jobs as executives at Pacific Scene, a San Diego-based residential developer with projects located out of the county, even out of state.
Both native San Diegans, Fontana, 48, and Mudge, 42, wanted to keep their company small enough that they could look after details of their projects themselves, from roof lines and colors to floor plans and fixtures, making the intuitive design and marketing decisions that mean the difference between a project’s success and failure.
1,300 Homes Sold
By all accounts, their approach has been successful. Swept along by San Diego County’s 6-year housing boom, Westana has sold 1,300 houses in 9 years, building a reputation as a low-key, high-value developer, making its two founders wealthy in the process.
Starting out in 1980 with houses in a South Bay project starting at $80,000 that were marketed to first-time buyers with VA loans, Westana has evolved to the point that the firm now specializes in more expensive “move-up” products geared to homeowners looking to step up in size and quality. Prices at Westana’s newest subdivision, for example, Westridge in Rancho Penasquitos, will start at $250,000 when sales begin next month.
But Fontana and Mudge have been growing increasingly cautious in recent months. They fear that a downturn in the housing market--caused by a jump in interest rates or unaffordably high prices--could leave them holding every developer’s nightmare: unsold inventory.
As a result, Westana has gradually scaled back its construction from a peak of 350 houses sold in 1984 to the 100 units they expect to sell this year. And they envision a time soon when they may have to build projects outside the county if they are to remain in the business at all.
Land Costs Soaring
The principal cause of caution is the high cost of residential lots in San Diego. Finished lots along the desirable California 163 “corridor” in San Diego from Rancho Bernardo south to Tierrasanta now cost upward of $120,000 each, more than 50% more than a year ago and roughly five times the cost when Westana began business in 1980.
The cost has been pushed up, Fontana said, by the increased competition among local builders for finished lots, a commodity that has grown increasingly scarce as San Diego County communities put slow-growth ordinances and restrictive planning policies into place.
While the supply of land has diminished, the number of home builders vying for it has increased in recent years. Several out-of-state and foreign developers have entered the local market, attracted by tales of San Diego’s booming economy and sharply increasing housing prices.
The result has been a speculative frenzy in land that has yet to peak, Fontana said. Developers are buying lots knowing that the deals do not “make economic sense” at current housing prices but betting that the double-digit price increases will make the land a sound investment a few months down the line.
“Historically, people in our business always give their success back in a downturn because they anticipate price increases that don’t come to pass,” Fontana said. “When the market turns down, the ones on the edge find themselves in trouble.”
Both Fontana and Mudge concede that they have guessed wrong over the past year or so by refusing to pay San Diego’s inflated lot prices. As a result, they have cut themselves out of the tremendous profits that their competitors have made. “The rising market has cured an awful lot of ills,” Fontana said.
Bob Buie, president of Buie Corp., a San Diego developer that has seen its sales grow from zero to $200 million in 5 years, made a decision similar to Westana’s a couple of years ago, deciding to pass on many San Diego land deals, and building instead in Riverside County, Nevada and elsewhere.
Concern Over Affordability
“We have been more conservative than others because we were worried about affordability,” Buie said. What worries Buie most is the increasing “unaffordability” of entry-level housing in San Diego, making it more difficult for people to sell their existing houses to move up to more expensive houses such as those Buie sells.
Smaller, more cautious developers such as Westana are also handicapped by the fact that more and more developable lots are in the hands of giant land developers who expect merchant builders--developers who buy only finished lots as opposed to those who start with raw land--to accept marginally economic land or be dropped from the list of preferred customers.
This is a game that Westana refuses to play, said Mudge and Fontana, both of whom are second-generation home builders and who remember San Diego County’s housing depression in the early 1980s, when builders were stuck with hundreds of unsold houses in a high-interest, deflationary market.
“We are at a point where we wonder how much more can the market take, how much higher can prices go,” Mudge said.
