Survey Finds Home Builders Upbeat on ’90
Although they aren’t as optimistic as they were a year ago, 184 Southland home builders predict that the new-home market will pull out of its current slump and that their sales volume will rise by nearly 19% this year.
But at the same time, many of those builders admit that the sales slowdown in the second half of last year caught them by surprise and left them with hundreds of empty houses.
As a result, some have been forced to slash their asking prices and many are postponing new projects until the market strengthens.
Those are just some of the findings of the 19th annual Times survey of residential construction and interviews with several of the builders who took part.
A total of 184 home builders active in a seven-county Southland area responded to this year’s survey, answering questions about their 1989 sales activity and projections for 1990. One large builder--M. J. Brock & Sons of Los Angeles--reported its 1989 sales but made no projections for this year.
The William Lyon Co. was named the Southland’s No. 1 builder, based on its 1989 sales volume of $638.2 million. It was the third year in a row that the Newport Beach-based company’s revenue topped those of other survey respondents.
The company, which completed 3,594 homes in Southern California in 1989, expects to build another 3,519 units in two dozen Southland communities this year. It will build in five Southland counties, from $95,000-condominiums in south Orange County to $450,000-single-family homes in Walnut.
For the fourth year in a row, Santa Monica-based Watt Industries Inc. was named the No. 2 builder. It completed 2,613 homes in the Southland last year, and its sales volume totaled $543 million.
Watt expects to build another 2,149 units in 22 Southland communities this year, from $50,000-condos in Victorville to $3-million single-family homes in the posh Westside community of Century City.
About 69% of the homes that Watt builds will be single-family houses. The remainder will be apartments, condominiums and townhouses.
The Casden Co./CoastFed Properties of Beverly Hills was ranked No. 3, based on the $381.64 million in sales that it logged in its latest fiscal year.
Casden built 1,757 homes--most of them apartments--in the fiscal year that ended Oct. 31. About 80% of the units it plans to build this year will also be apartments.
By and large, the survey confirmed that most of the big builders just keep getting bigger. Seven of the Top 10 companies were also in the Top 10 a year ago, and all of them were in last year’s Top 20.
“It’s getting harder for smaller companies to compete because home building is becoming more capital-oriented,” said R. Chad Dreier, chief financial officer of No. 4 Kaufman & Broad Home Corp.
“Development costs are rising, and the processing time and entitlement time is getting longer. It’s costing more money to build homes these days, and the little companies are getting squeezed.”
Kaufman & Broad completed 2,050 homes in the Southland in the fiscal year that ended Nov. 30, logging $347.217 million in sales.
The Los Angeles-based company plans to build another 1,969 homes in 17 Southland communities this year. All of its units will be single-family detached, with an average sales price of $165,000--continuing the company’s strategy of catering to first-time buyers.
Respondents to the survey complained about a wide range of problems, from sharp run-ups in the value of raw land to the difficulty of lining up financing for new projects.
Perhaps the most common complaint was that elected and appointed officials, as well as slow-growth advocates, are creating costly delays for builders through their bureaucratic red tape and--occasionally--lawsuits.
For example, Anna M. Hassell, president of Bella Vida-Jones Ltd. in El Toro, said it took three years just to win the approval of local officials to build a 35-home tract in the San Diego suburb of Santee.
Another year was added when officials ordered changes to the project. Hassell complained that actual construction time took yet another year “due to changes and city constraints,” meaning it took half a decade to build 35 houses.
Several builders said that such long delays add to their construction costs and eventually are passed on to buyers through higher purchase prices, exacerbating the Southland’s already serious affordability problems.
Many builders--large and small--also said that they’re being hurt by the slowdown in new-home sales that set in during the second half of last year.
In fact, the 185 builders who responded to this year’s survey had a total of 5,574 empty homes for sale at the end of 1989--a hefty 26% more than the 194 builders who responded to last year’s survey.
And in a dramatic reversal, two-thirds of all the builders said they had at least some completed homes sitting empty at the end of last year. At the end of 1988, two-thirds of the builders said they were sold out.
Many of the big builders said they’re trying to lure buyers back to their tracts by offering a variety of incentives, from price discounts to free trips and upgrades.
Smaller builders are feeling the pinch too.
Garfield Sorenson, president of W. B. Construction Co.--at No. 184, the second-smallest company in this year’s survey--built just three homes last year but could sell only two.
“I have a three-bedroom, two-bath home in Santa Paula for $169,900--that’s very affordable--but I haven’t been able to sell it for 5 1/2 months,” Sorenson said. “Last year, I sold an identical home for $185,000.
“If I cut the price again, I’m going to lose all my profit. But I might have to bite the bullet. This market is dead in the water.”
Even some of the builders who anticipated last year’s slowdown and subsequently cut back on new development projects remain cautious about 1990.
“We didn’t start a single new development last year, but (instead) concentrated on the three projects we already had under way,” said James W. Oates, a principal of the Whitehawk Partnership Inc. in Pasadena.
“I don’t think the downturn in sales is going to last long, and we’ll probably get back into the market toward the end of the year. But right now, we’re just looking at possible sites--there’s no reason to rush.”
Despite the sales slowdown, builders remain optimistic about this year’s outlook.
About 73% of the builders said they expected to see their sales volume rise this year. However, that’s down from the 82% who predicted a sales increase in 1989 from their ’88 levels.
If the 184 companies that provided 1990 sales projections meet their expectations, their total sales volume this year will reach $14,738,000,000. That would be an 18.8% increase over their 1989 sales of $12,402,000,000.
However, builders have a reputation for being optimistic--sometimes overly so.
For example, 137 firms took part in both the 1988 and 1989 surveys. Back in ‘88, they all made projections for sales in ‘89--and 80% said their sales would likely improve.
But results from this year’s survey show that only 29% of those companies met or exceeded their sales goals for 1989. The other 71% fell short.
Some of the builders who responded to the survey said that they’re diversifying into other types of construction to counter the cyclical nature of the home building business.
For example, Weston Development--until recently a company that built only residential property--last year built two mid-sized shopping centers in Ventura County, in addition to 214 homes.
“Commercial property and residential property usually follow different cycles,” said Bob Jones, a Weston vice president.
“By diversifying into shopping centers, we’re smoothing out our cash flow and aren’t as vulnerable to the ups and downs of the home-building business.”
Despite widespread concern that the nation is becoming overly dependent on imported oil and gas, only 13 builders--7% of the survey’s respondents--said they plan to construct homes or pools with active solar-energy systems.
In the previous year’s survey, 9.3% of the builders said they would include solar-energy systems in their new homes.
Moreover, nearly half of the 3,648 planned units that will have solar-energy systems will be in two large apartment projects built by one company--GBW Properties Inc. of Los Angeles.
“The up-front cost of installing the systems is pretty high, but we can recoup the investment in about a year and a half because it reduces the time it takes to lease up the project,” said Ken Charlton, GBW’s chief financial officer.
The solar-energy systems reduce the typical tenant’s bill by about 25%, Charlton said. “Since the tenants know that their utility bills are going to be lower, they’re usually willing to pay a little bit more in rent. That helps us recover part of our up-front costs too.”
SALES INDEX
Index of median sales volume and projected sales volume in Southern California for firms participating in The Times’ 1972-’89 residential building surveys.
Sales Volume Projections (1971 100.0) (1972 100.0) 1971 100.0 1972 100.0 1972 104.3 1973 97.7 1973 97.8 1974 89.8 1974 85.9 1975 78.1 1975 76.1 1976 81.3 1976 105.4 1977 142.2 1977 141.3 1978 156.3 1978 144.6 1979 151.6 1979 144.0 1980 125.0 1980 142.4 1981 125.0 1981 91.3 1982 78.1 1982 80.4 1983 96.1 1983 83.7 1984 140.6 1984 128.3 1985 157.0 1985 196.7* 1986 196.1** 1986 260.9 1987 213.3 1987 262.1 1988 210.2 1988 321.7 1989 225.8
NOTE: Southern California includes Kern, Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties.
* Based on revised sales volume for 1985.
** Based on revised sales volume projections for 1986.
INDEX OF MEDIAN AND PROJECTED SALES VOLUME
Southern California firms participating in the Times’ 1972-90 residential building surveys. Sales Projections: 1972=100 Sales Volume: 1971=100 Source: “Residential Building in Southern California” Los Angeles Marketing Research Department, 1972-90. Technical Support
Technical support for the 19th annual Times survey of residential construction in Southern California was provided by Claudia Brennen, Lisa Chavez, Martha Singer and Clif Tanaka of The Times’ Marketing Research Department, and Michael Hall of The Times’ Editorial Art Department.
