Orange County 1990 The Year in Review : O.C. Home Sellers, Builders Wait and Wonder at the Lag
Paul Durso says stubbornly that his Brea home will be on the market until the year 2000 if that’s what it takes to fetch a reasonable price. He’s been trying to sell it for over a year so that he can move to a fancier house.
Durso has found out the hard way about Orange County’s housing slump. After years of brisk activity and runaway appreciation, the housing market this year experienced flat sales and falling prices.
Suddenly, homeowners wanting to move up couldn’t because they couldn’t unload their depreciating residences. Others wanting to get a share of the American Dream either couldn’t afford it or were afraid to buy in to an uncertain market.
“People saw their neighbors make 30% to 40% on their homes in the past few years, and nobody out there is willing to discount price,” said Marta Borsani, a real estate consultant for Robert Charles Lesser & Co. in Newport Beach. “They will take their homes off the market. Maybe they will have to put little Johnny into a bedroom with little Stevie, but they will wait.”
Even in the current environment, however, optimism still reigns. “It’ll turn around,” Durso said. “This is California.”
But even California, the golden land of seemingly ever-upward housing prices, this year began to feel the effects of the economic slump that is crippling the housing industry. Prices and sales throughout the nation fell, and Orange County was not immune.
The downturn actually began to surface here in late 1989. And it came as a rude surprise to a county where, throughout the mid-1980s, homes appreciated up to 20% a year, and buyers were known to bid more than the asking price for the home of their dreams.
While private homeowners who didn’t have to sell held firm to their asking prices, builders began discounting new homes by 10% to 15%, one offering a free Mercedes as an incentive to buy, another giving a cash rebate of $75,000 on $400,000 homes.
One analyst, Michael Meyer, a managing partner at Kenneth Leventhal & Co., said that 1990 in Orange County will go down in history as a major turning point in the housing industry.
“It was the culmination of seven years of appreciation in housing prices and trends towards bigger, upscale houses on smaller lots, to where it ended in a crescendo of affordability crisis,” he said.
Signs of the troubled times were everywhere:
* Home resales in the county plunged 31.9% in October from the same month last year, the biggest such drop since the housing slump of 1982.
* New home sales tumbled 18.1% in the second quarter from the same period a year earlier, as the inventory of unsold units climbed to an 18-month high.
* Builders turned to auctions as a marketing tool to move their hard-to-sell inventory. For instance, in April a developer auctioned off 39 new and high-priced, ocean-view homes in San Clemente.
* Residential construction fell to its lowest level since 1982. Builders with a backlog of unsold homes obtained permits from local governments for only 488 units in August, which was 61% fewer than in August, 1989. By the end of October, residential building permits for the county were off 51% from the first 10 months of 1989.
* William Lyon, whose Newport Beach-based company was the nation’s leading home builder last year in sales volume, began emphasizing land development and the financing of other builders as capital for construction loans from other sources dried up. Lyon estimated that up to 75% of the home-building capital in the country has been pulled off the market.
“Banks are reacting to soft market conditions,” one local commercial lender said. “In some instances, banks have shut the door; they’re not making real estate loans. There has been some overreaction.” Developers this year have had isolated cases of success with creative financing--through limited partnerships, Japanese investment and credit companies. But the successes have been few, and one analyst said he is concerned that cutbacks now will mean a future supply shortage and skyrocketing prices again.
“These wild swings are very unfavorable, not just for our industry but also for the consumer,” said Ken Agid, a real estate consultant in Irvine. “They create a false sense of values during the upswings, and a tremendous lack of confidence when the opportunity to buy is best, like now.”
He pointed out that interest rates are falling, the 30-year fixed rate for mortgages is the lowest it has been in years, and yet new houses are selling for comparatively bargain prices.
While demand for homes priced from about $350,000 to $600,000 has plummeted this year, demand has remained strong for lower-priced, single-family houses and condominiums. In late August, prospective buyers camped out for two days at Lyon’s Avignon tract in the Foothill Ranch, where single-family homes were starting at $209,000.
“For entry-level housing, we are finding strong sales,” said Richard Sherman, a senior vice president with Lyon.
Meyer said this year reminds him of the affordability crisis experienced by the area a decade ago. And the county emerged from those years with higher-density development and more apartments.
An indication that builders are reacting to demand for lower-cost housing came from a study by First American Title Insurance Co. that said 455 homes were sold for $300,000 or less from mid-February to mid-March, while only 225 homes sold in that price range six months earlier.
Also, while building permits for single-family homes fell by 51% through October, permits for multifamily units--condominiums and townhouses--rose by 8.4% during the same period.
“What builders are gearing towards are condos, small square footage, small lots, more cost-efficient construction,” Agid said. “What little new supply that will be generated will be targeted to the first-time buyer or the first-time move-up.”
Agid said the slump in the building industry has spread out in ripples to affect engineers and design consultants, roofers, plumbers, carpenters, drapery hangers, tile fitters, lumber and steel suppliers, and just about anybody associated with construction. Home-related retailing is also feeling the pinch.
Construction employment peaked at 72,950 last year and is expected to plunge to 63,600 by the end of 1991, according to economists at Chapman College. That’s a two-year drop of nearly 13%.
Depending on who is making the prediction, the housing industry here is expected to begin recovering as early as the third quarter of 1991 and as late as the summer of 1992. However, no one is predicting the boom in values or construction activity that prevailed from 1986 to 1988.
Esmael Adibi, a Chapman College economist, said real home values will rise about 6.5% over the next five years, removing housing from the realm of speculative investment in Orange County.
“This is a time when people will come to reality and buy what they need,” said Borsani, the Newport Beach consultant. Declining Sales The trends in Orange County’s housing market turned bearish in 1990. Sales slowed and prices fell. After several years of double-digit appreciation, home prices are rising at less than the rate of inflation. The industry is responding with a virtual halt in new construction-reflected in the drastic drop in building permits issued this year. Layoffs devasted the construction trade and sent many subcontractors to bankruptcy court. Decling Sales Single-family homes and condonimiums sold per month: Price Erosion Predicted price appreciation for resale single-family homes and condominiums shows little gain in 1991. When inflation is taken into account, the real value of homes is expected to fall next year. New Resale Average price of single-family homes and condominiums, in thousands of dollars Appreciation In percentage change: ‘85: 1.8% ‘86: 5.8% ‘87: 9.9% ‘88: 20.8% ‘89: 23.8% ‘90: 3.4% ‘91: 2.8% Building Permits Single-family 10-month totals: 1987: 11.3% 1988: 18.8% 1989: -29.5% 1990: -51.0% Multifamily 10-month totals 1987: 17.0% 1988: -28.1% 1989: -30.5% 1990: 8.4%
