House Arrest : O.C. Home-Building Industry Lags While Most of State Enjoys a Modest Recovery
Orange County’s home-building industry--hogtied by high land prices and limited construction financing--is lagging behind a slight recovery in much of the rest of California, according to a report released Tuesday.
The 2,089 permits for single-family housing issued in Orange County through June 30 represent a 4.7% drop from the 2,192 a year earlier, well below the average 3.2% increase in single-family permits issued statewide, reported the Burbank-based Construction Industry Research Board.
Permits for new apartment construction in the county were down 27.2% for the first six months, to 1,377 units from 1,891 a year earlier. But anemic as the January-June numbers are, Orange County’s apartment market is healthier than the state average, which fell 37.1%.
Still, with the moribund commercial and industrial construction industry in even worse shape than the residential industry, the overall picture for Orange County’s economy in the last half of the year is not a pretty one.
“Builders have looked around and pretty much written off the rest of 1992” in Orange County, said Irvine marketing analyst Kenneth Agid.
And with an estimated 60% of the county’s economic output linked to the construction industry and the population and job growth that new development brings, that doesn’t bode well for a local economic recovery this year.
For home shoppers, however, it means there is a growing threat that once the economy does start improving there will be a housing shortage that will drive up prices in Orange County at a much faster pace than in surrounding regions, industry specialists say.
Agid said the 2,000 new housing units that remain unsold in builders’ inventories in Orange County makes up one of the smallest inventories in the past 20 years and will be eaten up in three to four months even at today’s depressed sales pace.
Because it takes four to six months to build a new home after the permits are issued, that means construction could start on only 6,000 to 8,000 new homes in the county this year at current permit levels, according to Agid.
In a normal economy, he said, the county housing market needs an inventory of about 5,000 homes and annual construction of 10,000 to 12,000 homes just to keep supply and demand in balance.
But until the economy turns around, “Orange County will definitely lag the rest of the region” in new construction, said Dave Chereb, president of Metropolitan Area Projects, a Costa Mesa firm specializing in real estate market analysis.
Banks in Southern California “are still very restrictive about real estate lending,” he said, “and prices in Orange County are still very high.”
With employment slumping in the county’s two-year recession--especially employment in the higher-paid computer and technical industries--there is a dearth of buyers willing to pay the high prices that Orange County homes once commanded, Chereb said.
The dismal local numbers don’t mean that the county’s home builders are taking big new hits, just that they are concentrating more of their activity in areas that still are showing signs of life.
What makes for a livelier market, builders say, is the availability of land at prices that enables them to build entry-level housing that construction lenders prefer to finance.
“The availability of money (to buy land and finance construction) is a major factor in why Orange County is lagging,” said Carl Aikens, chairman of the Aiken Cos. in Irvine. “The retail pricing of homes has come way down, but the price of land hasn’t followed, so when you look around Orange County it is hard to find land deals that make sense.”
Construction lenders seem to focus on two areas, Agid said. “They want to lend on housing for the first-time buyer, and in California that is housing priced below $200,000--below $150,000 makes them even happier. But they also want that housing to be conventional, detached, single-family housing.”
And in much of Orange County--particularly in the large planned communities of South County--new detached homes at $200,000 or less “are almost nonexistent,” Agid said.
Builders’ inability to come up with housing projects that meet the construction lenders’ requirements “helps explain why there is a very limited number of permits” being issued in Orange County, he said.
But Agid and others also maintain that the slump is not caused by a growing lack of buyer interest.
“I have four projects in Orange County that are ready to go, but I can’t start them because we can’t get financing,” said David Caillouette, regional vice president of marketing and sales for the Baldwin Co. in Irvine.
Even though the company already is selling some of the entry-level homes to buyers who are making their choices from architects’ renderings rather than completed models, Caillouette said, the company is finding it difficult to find construction lenders willing to authorize the cash needed to start construction.
One problem, he said, is that many large builders have pre-recession debt on their bank credit lines that meets or exceeds the limits federal regulators have established for banks’ real estate lending.
Still, there is some building activity in the county. Although it was the worst June for permits since the 1981-82 recession, builders in Orange County did obtain permits during the month to build 309 single-family units and 592 apartment units.
At Warmington Homes in Costa Mesa, for example, President Tim Hogan says the company is moving ahead with a development of luxury homes in San Juan Capistrano that will be priced at $300,000 to $350,000. Because Warmington bought the land in a distress sale at about 35% below its previous selling price, it will be able to price the houses at $40,000 or so less than comparably sized and equipped homes.
“We have very little competition in the area,” he said, “so we don’t expect to have any problems.”
The same is true of a Warmington project in the northwest Los Angeles County community of Valencia, he said. “We have sold 40 units in the last 2 1/2 months and, because there is little competition, we were even able to raise our prices a little. In Orange County, the opposite is true. You have to increase your discounts to sell.”
And when lenders look at that equation, he said, “it makes it easier to get a construction loan to build houses in Valencia than for a project in Orange County.”
Summertime Blues for Construction
Traditionally, summer is a time when the construction industry thrives. But high land prices and a shortage of financing have caused a dramatic drop in the number of new single- and multifamily housing units being built in Orange County and Southern California. Northern California is faring much better.
June Swoon
Last month was the worst June for Orange County’s residential and non-residential builders in seven years.
Building Slowdown
The combined total of single- and multi-family housing being built is in Southern California for the first six months of 1992.
Los Angeles:
1991: 8,438
1992: 6,198
% change: -26.5% Ventura:
1991: 1,108
1992: 985
% change: -11.1% Orange:
1991: 4,083
1992: 3,466
% change: -15.1% San Diego:
1991: 5,551
1992: 4,132
% change: -26.6% San Bernardino/Riverside:
1991: 8,427
1992: 8,044
% change: -4.5%
Rest of State Faring Better
While Southern California continues its building slump, overall construction in the central and northern parts of the state is doing better the first half of this year compared to the same period last year.
SINGLE-FAMILY UNITS MULTIFAMILY 6 mos. 6 mos. Percent 6 mos. 6 mos. County 1991 1992 change 1991 1992 SOUTHERN CALIFORNIA Orange County 2,192 2,089 - 4.7 1,891 1,377 Los Angeles 3,695 3,832 + 3.7 4,743 2,366 Ventura 507 609 +20.1 601 376 Riverside/San Bernardino 6,853 7,293 + 6.4 1,574 751 San Diego 3,932 2,248 -42.8 1,619 1,884 Santa Barbara 389 274 -29.6 8 123 CENTRAL CALIFORNIA Bakersfield (Kern) 1,623 2,277 +40.3 122 234 Fresno 1,854 1,813 - 2.2 591 294 Merced 410 546 +33.2 17 30 Modesto (Stanislaus) 846 1,039 +22.8 138 52 Stockton (San Joaquin) 1,095 1,248 +14.0 15 46 NORTHERN CALIFORNIA Alameda 2,044 2,882 +41.0 1,787 552 Sacramento 3,795 4,520 +19.1 1,619 753 San Francisco 563 330 -41.4 403 588 Santa Clara 1,046 920 -12.0 1,094 515 Santa Cruz 130 149 +14.6 29 141 Napa 743 1,208 +62.6 296 117 Sonoma 927 1,061 +14.5 32 132
UNITS Percent County change SOUTHERN CALIFORNIA Orange County -27.2 Los Angeles -50.1 Ventura -37.4 Riverside/San Bernardino -52.3 San Diego +16.4 Santa Barbara +1,437.5 CENTRAL CALIFORNIA Bakersfield (Kern) +91.8 Fresno -50.2 Merced +76.5 Modesto (Stanislaus) -62.3 Stockton (San Joaquin) +206.7 NORTHERN CALIFORNIA Alameda -69.1 Sacramento -35.6 San Francisco +45.9 Santa Clara -52.9 Santa Cruz +386.2 Napa -60.5 Sonoma +312.5
Source: Construction Industry Research Board
