Builders See Overblown Bubble Talk
What housing bubble?
California home builders said this week that conditions were in place to ease the risk of a flameout in the state’s sizzling housing market. Don’t expect a crash, just a slowing in the rate of home price appreciation, they said.
In fact, the only B-word heard here at this week’s annual West Coast convention of home builders was “build.”
California builders are convinced that if they can construct more homes at a faster pace, any distortion in the real estate market will work itself out. Prices in this cycle have escalated -- fueling fears of a bubble -- largely because there is not enough housing to meet demand, they said. They estimate that the state needs to add 240,000 housing units a year to keep pace with population growth. They complain that regulatory and other constraints prevent them from constructing what’s needed.
“Demand is strong, and supply isn’t keeping up with demand,” said Steve Doyle, president of the California Building Industry Assn. and the regional head of Del Mar, Calif.-based Brookfield Homes Corp.
“For builders, you could say that’s good news,” he added. “We’re building a product that a lot of people want, and we’re able to sell everything we build, usually before we even pour the slab.”
Publicly traded home builders such as Brookfield have many other reasons to be cheery, as investors continue to bid up their stocks amid strong profit increases, while mortgage rates stay at or near generational lows.
Some economists and other critics still profess worries that the state’s home prices have risen too far too fast, creating a bubble that could end badly if mortgage rates rise sharply or the economy falls into recession.
Builders say the worries are overblown. In recent months, the pace of home price appreciation in California has slowed. But that’s a good thing, said the building industry association’s chief economist, Alan Nevin, because it suggests that the market is entering into a more normal and sustainable phase that should allow more people to become homeowners.
He predicted Thursday that the rate of home price increases in California would return to “a more comfortable” level of 6% to 8% this year, down from the torrid 22% pace in 2004.
The high rate of appreciation, Nevin said, has been an “unnatural phenomenon.”
Still, rising prices have given California homeowners $1 trillion in equity since 2000, according to a study done by Nevin’s firm, Marketpointe Realty Advisors, with DataQuick Information Systems.
But many potential buyers haven’t been so lucky. High home prices have made affording a house more difficult for a growing number of people. According to some estimates, fewer than 20% of Californians can afford a median-priced home of $424,000 using conventional financing.
The ever-increasing median price is prompting more builders to look beyond constructing expensive single-family houses on pricey parcels. Their new focus is on smaller attached units such as condos and townhomes in lower-priced urban areas.
To that end, builders packed convention sessions this week devoted to so-called infill development, where land previously used for other purposes is “recycled” into housing and commercial development.
“We see an unlimited supply of recyclable land,” said Jay Stark, managing director of Phoenix Realty Group, an L.A.-based firm that invests in infill projects for institutional clients.
With rising land prices, “builders are looking for more affordable alternatives,” Stark said.
Indeed, infill and other high-density housing development will help end the deficit of homes, say economists at USC’s Lusk Center for Real Estate, who offered a mostly rosy outlook Thursday to the builders group.
The state should avoid a housing crash, barring some major event such as massive job losses or a severe fluctuation in the foreign currency market, they said.
