ORANGE COUNTY IN BANKRUPTCY : This Time, Some Cheer Amid the Gloom : Housing Prices Likely to Rise if Builders Are Hit With Higher Fees

Housing prices in Orange County are sure to rise as a result of the county’s Chapter 9 bankruptcy, local real estate experts said this week.

Home builders expect to be hit hard with new user fees and increased building permit costs as cash-strapped cities, special districts and the county seek ways to shore up their depleted finances.

As in the past, developers will pass the added costs on to consumers in the form of higher home prices.

“They impose them on me and I pass them right on to you,” said Roland Osgood, president of the South Coast division of Kaufman & Broad, a Los Angeles-based home builder.

Still, “construction won’t stop, because there is market demand to be met,” said Chris Taylor, vice president of Coto de Caza Ltd., a major South County land developer.

The county filed the largest municipal bankruptcy in U.S. history last week after a high-risk, multibillion-dollar investment pool run by the treasurer’s office collapsed. Losses to date have been set at $2.02 billion.

In the past 20 years, mandatory construction fees--such as charges to help build parks and install street lights--have quintupled for builders in many of Orange County’s cities, Osgood said.

The average price of homes sold in Orange County reached a peak of $271,000 in 1989. Since the recession began in 1990, prices have dropped to an average of $256,000 for the first nine months this year, according to TRW-Redi Property Data Service Inc.

Even the slightest fee increases could have a devastating effect on the local economy, which has just begun a modest recovery, said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County.

“It would put us in a non-competitive position,” Kyser said. “These out-of-state raiders try to lure companies out of California all the time using information about high cost of housing. The decline in housing prices has put us in a better competitive balance.”

Indeed, H. Fred Mickelson, chairman of the Orange County Chamber of Commerce and Industry, recently boasted that the housing price decline this decade has been a big selling point for the chamber in its efforts to retain and attract business to Orange County.

Since 1989, the price of new housing in the county has dropped by about 15%. But between 1980 and 1989, housing prices more than doubled, according to Riverside-based TRW-Redi.

“To solve the problems of the county, they (government officials) have leaned really heavily on new development,” said Taylor, the Coto de Caza executive.

Building permit fees started rising after the 1978 passage of Proposition 13, which restricted government’s ability to increase property taxes. Communities instituted builder fees to help make up the difference. And in rapidly growing areas like Orange County, the fees and soaring home prices combined to generate a substantial amount of money for governments.

Many now predict that higher fees will be a principal way governments in Orange County will try to cope with their investment losses.

“Insofar as these agencies and cities decide to try to recoup their losses by raising new revenue, they probably will raise user fees,” said Dean Misczynski, director of the state Library Research Bureau and an expert on special tax laws.

Buyers of new homes in Orange County already are shelling out plenty to cover building fees. School fees on a new house, for example, range from $3,500 to $5,500 depending on the district. And city-imposed fees for capital improvements, such as streets, sewers and lighting, can add from $2,400 to $22,000 to the price of a residence.

In total, such fees add $16,000 to $25,000 to the cost of a typical new home in the county, according to the Building Industry Assn. of Orange County.

The bankruptcy, which has devastated the county’s credit-worthiness, will also hamper the government-supported financing mechanism that developers have come to depend on.

In recent years, the roads, sidewalks, sewers and street lights needed to build a new housing tract have been paid for by special development bonds, called Mello-Roos bonds. Since the early 1980s when such bonds were authorized, Mello-Roos bonds have been the preferred financing of local home builders, because they are the least expensive method of paying for infrastructural improvements.

Though Mello-Roos bonds are issued by the county in which development is taking place, they are not repaid by county funds but by the homeowners. Still, real estate and municipal bond experts doubt that the market for Orange County Mello-Roos bonds will recover for some time.

“Because it is connected with Orange County, nobody wants to touch it,” Osgood said.

These days, any Orange County building project--no matter how financially strong the developer--is plagued with a perception problem, said Robert Firring, partner at municipal bond underwriter Stone & Youngberg in Los Angeles. “The bankruptcy casts a pall on everything.”

Over the long term, the situation will improve, but that could be many years from now, Firring said.

“To a certain extent New York’s past problems plague it today,” he said. “People don’t forget negative things.” New York City narrowly escaped declaring bankruptcy 19 years ago.

An alternative for builders is to look to traditional bank loans or corporate bonds, which would cost at least three percentage points more in interest more than similar Mello-Roos issues.

Funding difficulties have already begun to appear.

Irvine Co. spokeswoman Dawn McCormick said this week that financing plans are now in limbo for a new development in lower Peters Canyon, a planned community to be built in unincorporated Orange County next to Tustin.

The bond crisis is forcing the Irvine Co. to look at other financing options, said McCormick, adding that the Newport Beach-based developer might consider paying for the sewer and street improvements itself. “The project is not being put on hold,” she said.

But such added construction costs are precisely what will likely drive up the price of homes, according to Taylor.

“All they will do is ratchet up their housing prices and the people at the bottom of the market will have no opportunity to buy,” he said. “The people who are going to suffer are the people of Orange County.”