S. KELLY McDERMOTT : The Big Picture on Housing : Market Profiles Offers Builders a Window on Trends

S. Kelly McDermott started her career in advertising, but she now spends many of her days crunching numbers. McDermott is a vice president at Market Profiles of Costa Mesa, one of the better-known consultants to home builders and developers in Orange County.

McDermott has been watching Southern California real estate since the late 1960s, first for big outfits such as Real Estate Research Corp. in Los Angeles, and later for smaller consulting firms such as Newport Economics in Orange County. Market Profiles employs about 40 in offices in San Diego, Denver and at its headquarters in Costa Mesa.

The past year has been one of turmoil for residential real estate in Orange County. It was a time that saw buyers scrambling to buy nearly anything that came on the market, even camping overnight to buy a new house.

Prices--already high--went through the roof, and suddenly even relatively affluent county residents discovered that they could not buy a house. Condominiums became popular. Builders who had bought land before the boom made a fortune. Others frantically tried to find a patch of ground to build on so that they could get in on the action.

Things have quieted down, but home sales have still been exceptionally strong this year. Prices are continuing to rise, although not nearly as quickly as they were 1988.

McDermott--who has a bachelor of arts degree from UC Berkeley and has done graduate work at Cal State Fullerton in psychology and communications--recently assessed the market for new homes in Orange County with Times staff writer Michael Flagg.

Q. One week you hear home sales are slow, and the next you find some project that has people lined up waiting to buy. How are sales of new homes this year?

A. I’m amazed when people say home sales are slowing down. The year got off to a slow start, but for the years 1984 through 1988, approximately the same number of homes were sold (annually) in Orange County. The range is between 10,000 and 13,000, which is pretty close. In 1988, for example--which was such a frenzied year--total sales were 11,269. In 1987, which was a very strong year but a more normal one in the sense that there wasn’t this frenzied atmosphere, there were 13,498, or more sales than in 1988.

Q. So sales have been fairly steady this year?

A. They certainly aren’t slowing down. The pattern of sales activity is just different.

In 1988 you had people camping out; a builder would release 20 homes and--bang--they were gone. 1987 was a steadier year. It wasn’t bumpy in the sense that 1988 was, where a builder would sell out all his homes in half an hour and then it’d be two months before he could build more and put them on the market. 1987 and 1989 are just kind of running along, and to some people that makes them look different. They think if there’s no frenzy of buying, it can’t be a very good year. But 1989 is actually a very strong year. After all, the builders have already sold 5,600 houses this year.

Q. Most people attributed the home-buying hysteria last year to the slow-growth initiative, which the building industry portrayed as a shutdown of new home construction. But the election in which it was defeated was in the middle of the year. What do you think caused the frenzy?

A. It was partly the slow-growth initiative, and it was partly the result of the 1986 Tax Reform Act, which abolished tax write-offs for a great many different kinds of investments. Many people’s accountants advised them to liquidate all their assets that had become non-performing and put their money into the biggest house they could buy, because that was the only write-off left.

Q. One hears about an influx of Asian buyers too.

A. There was the Pacific Rim and Asian influence, which was the third big factor--those buyers who came over and began buying property and detached homes here. So there were three things going on at the same time. And we were six years into a recovery; people had a lot of money. They were discovering they had a couple hundred thousand dollars’ equity in their homes and they decided they should be doing something with it.

Q. Which of these factors would you say was most important?

A. It’s hard to say, but from a psychological viewpoint probably the most predominant factor in people’s minds--simply because the press gave it a lot of space--was the slow-growth initiative. People thought there would be no more homes left, but of course that was illogical, especially after it was announced there would be these development agreements that would still permit many thousands of homes to be built. But once something like that gets rolling, it’s no longer based on logic; it’s based on emotion.

Plus people were double-escrowing (agreeing to buy, then quickly reselling) homes and making $80,000 on them in a couple of months. Fear and greed are two powerful motivators.

Q. Who were these Asian buyers? Some builders I’ve talked to say Asian buyers account for one-third of the buyers at some of their projects.

A. Yes, and at the high end of the market it could be as many half. Some of them are people who had lived in Southern California a long time and found themselves with a lot of equity in their houses. A lot of them had moved here with their companies. And some of them are investors. When you consider how little $450,000 buys in Japan, buying a house here is like being let loose in the candy store. The desire to get money out of Asia on the part of investors is also very strong after the recent events in China.

Q. What about the resale market? How do the markets for new and used homes interact?

A. The resale market feeds the new-home market. If the resale market is hot, then the new-home market will be hot. And the resale market gets hot based on the amount of equity people have in their homes. The resale market is generally--aside from what went on last year--not as hot in an area where there are a lot of new homes.

Q. Which price ranges are selling best in Orange County this year?

A. In the first half of 1988, there were 1,383 homes sold priced over $300,000, and that was 21% of total sales. For 1989, there were 1,561 homes sold over $300,000, which was 36.6% of all sales. That indicates a lot of movement in that price range. In houses priced over $400,000, this year there were 1,077 sold, 25.3% of the total. Over $450,000, it was 740 sold, or 17.4%.

Q. Who’s buying these days with prices such as these?

A. The biggest category of buyer is the yuppie buyer. Some of them have delayed buying homes because they didn’t have children and were spending a lot of their time making money. But now they’re having kids and looking for houses.

The problem is that in 1988, we blew through so many price ranges in the market for detached houses that suddenly a market void opened between $150,000 and $200,000. There was nothing in that price range. People who had bought small condominiums, for instance, and planned to eventually buy a house suddenly found that they would probably never be able to afford a detached home. So we saw this huge market gap opening, and we advised our clients who build attached housing to scrap their plans for small and inexpensive condominiums for the first-time home buyer and start thinking about building attached housing for growing families--units with family rooms, that sort of thing, for people who already had children or with a child on the way.

Q. What kind of price range are we talking about?

A. Still $150,000 to $200,000, because there was literally nothing in that range for a while. Now there are a lot of condos in that range coming on line in places like Aliso Viejo. But it’s a different type of product than might have been originally contemplated by the builders.

There’s been a lot of sticker shock in the sense that people who were planning to maybe spend $225,000 for their first detached house have found that amount buys them an attached unit now. A nice unit, mind you, but an attached one nevertheless. Now all of a sudden if you want to stay in Orange County--even a dual-income family making a respectable income--your only option is attached housing.

If you’re thinking of a detached house, you may have to think about Victorville, because you may even be priced out of Fontana. What nobody had anticipated happening has happened, and will continue to happen.

Q. Couldn’t Orange County builders construct denser and less expensive housing for some of these people? They are now stuck with commuting to work from places such as Fontana.

A. We don’t have anything with three or four stories built over parking, with 40 units to the acre, that’s for sale. People will accept that kind of density in apartments a long time before they’ll accept it in for-sale homes, because people think of apartments as a temporary thing while you’re getting ready to buy. But when people find out they’re absolutely priced out of the market, then they will accept it.

There are a number of projects in planning that are going to be like this. And people will struggle mightily not to accept them. But then when it comes to commuting from San Bernardino or Riverside county and spending hours in traffic, as opposed to driving 20 minutes to your job every day from a very nice attached housing project, then they’ll do it.

Q. Even then, won’t it be difficult to wean people from the dream of a detached house on their own plot of land?

A. Older cultures have already evolved highly dense living situations, as in Asian and European cities.

California is a young culture. According to the 1980 census, there were 54 people per square kilometer in California. There are about 1,500 in Japan. Attached housing of any type really only began to be accepted in Orange County in 1985. And then in 1987, when interest rates went down and land prices went up, this rapid escalation in home prices began and people had to accept condos.

But you have to consider that this market’s had only four years in which to adjust to a form of living that we thought we’d never have to adjust to, and now people simply don’t have any choice. We’re speedily adapting, in fact. That’s what the 1990s are going to be about. They’re going to be about the acceptance of housing types we’ve never had to consider before.

Q. Could one assume, then, that condominiums are selling well now?

A. Yes. Right now only about 60% of the homes sold in the county are detached. But that’s a big change from just a few years ago, when it was maybe 90%. The condos’ 40% will go up increasingly until it hits a balance and then tips over to become the majority of housing built in the county. That will probably happen by the end of the 1990s in Orange County.

Q. What’s the lowest price for a single-family house in Orange County these days?

A. In south county, the floor of the market begins at $200,000. There were just a handful priced between $175,000 and $200,000. So the market really begins at $200,000, and that’s not going to last very long because we’re running out of product. That’s also happening in the $225,000-to-$250,000 range. The market is presently defined by the $450,000-and-up category.

Q. What’s the average price of a new house in the county now?

A. It’s now $388,556 in the south county, as of the second quarter. And in the north county it’s even more expensive because so little housing is being built there (most of the land is already developed). The floor of the market is $225,000, and that’s rapidly going out. The average price in north county is $406,832.

Q. Where is most of the building that is going on in the northern part of the county?

A. To date, the predominant area has been both sides of the Santa Ana Canyon area--Anaheim Hills on one side and Yorba Linda on the other, going out toward Corona. But now the hills in back of Fullerton and Brea that had been owned by the oil companies are beginning to be developed. There are three master-planned communities with golf courses planned for the hills, that I know of. I’d imagine those would be very high-priced communities.

Q. Are we going to end up building on every square inch of Orange County? Builders seem to be putting up houses in places that people could not have imagined being developed 20 years ago.

A. Everybody says the developers are raping the land and paving over Orange County, but they couldn’t do that if there was no demand. So something’s driving all that construction, and it’s people’s desire for a home. I take some offense at the notion that this is all the builders’ fault. It’s not. You can’t build homes if nobody wants to buy them. And with that, they also build schools and roads and shopping centers. They haven’t built all this in a void, and they’re not out there doing it for fun; there’s a demand for it.

I sympathize with people who want to blame their frustrations with things like traffic on the people who are most visible, because that’s human nature. But I can’t condone it.

Q. Can’t some of the blame be shared by local governments, who in some cases allowed pell-mell growth? What sort of job, for instance, do you think county government has done in the south county?

A. Very bad. But people in the county Planning Department were saying 20 years ago we have to do certain things, get certain tax increases, to manage the growth that was coming. So it wasn’t as though nobody was thinking about this or hadn’t realized it. But then, when it came time for people to approve a sales tax to build roads, the voters said no. And then Sacramento didn’t give us the money we needed for new freeways.

Q. Which south county areas are seeing the most construction?

A. Well, they’re getting ready to build at the Irvine Coast. Coto de Caza is busy, and so’s Dove Canyon right next door. There are plans for Trabuco Canyon. A lot of the older cities are starting to redevelop, too. Things are generally moving east because we’re running out of room along the coast.

Q. Who among the local builders is doing really well?

A. The five biggest builder-developers in Orange County last year were the William Lyon Co., with 882 units sold and an 8% market share; the Bren Co., 682 units and 6%; J.M. Peters, 552 and 5%; S&S; Construction sold 498 and had 4.4%, and Standard Pacific sold 471 and had 4%. None of them, by the way, are our clients. They’re big enough to do market research in-house.

Q. You mentioned builder-developers. Are a lot of local builders becoming land developers as well?

A. It’s essential these days. You can only play the game if you have land to trade, because land is so scarce.

Let’s say you’re trying to get some land to build on at somebody else’s master-planned community. They may very well tell you you’re a fine builder with a good reputation, but if you don’t have some lots for them to build on in the future, why should they let you build on their land now? And if you don’t have a big equity partner standing behind you, somebody who’ll permit you to buy land so you can trade land, you’re going to be out of the game.

Q. Land is so expensive that builders are constructing increasingly larger houses on increasingly smaller lots. It is not likely that that will change in the future, is it?

A. No, it won’t change, if for no other reason than tax reform is pushing people’s money into bigger houses. Most people, even builders, don’t think there’s anything particularly wonderful about looking down a street and seeing a canyon of garages. But the architects have found some pretty good ways to make that kind of density work. For one thing, the space is going up, with high ceilings and that sort of thing that create a lot of volume and light.

Q. What is going to happen in the next few years?

A. Assuming the economy remains strong, we’ll continue to sell 11,000 to 12,000 houses a year. The ratio of attached housing to detached will continue to shift upward. There’ll be more in-fill development in central and north county, mixed-use projects melding retail and housing. And people will start to live closer to where they work. There’s something about looking out your window at the office building you just left that’s not terribly appealing, but I think people will start to value a 10- or 20-minute drive to work over a commute that’s become impossible.