State’s New-Home Sales Increase 4.4% in 2005

Build them and they will buy. At least they did last year.

Home builders in California had their best year in nearly two decades in 2005, selling 136,000 new houses and condominiums, data released Friday showed.

That was a 4.4% increase from the year before, according to real estate research firm DataQuick Information Systems. It also was the highest number of new-home sales since the La Jolla firm began keeping track in 1988.

The trend was the same nationwide, with new-home sales climbing last year to an all-time high of 1.28 million units, up 6.6% from 2004, the Commerce Department said Friday. It was the fifth straight year of record U.S. sales.

But the question now -- a day after California builders reported a 3% drop in housing starts last year -- is whether new-home sales have peaked.

Nationwide, the number sitting unsold would take 4.9 months to sell at the current sales pace. That compares with 4.1 months’ worth of homes in inventory a year ago.

Industry analysts are concerned that if demand slows and inventories continue to build, real estate prices could start to decline.

“They’re like the canary in the coal mine,” said Patrick Duffy, a managing director of industry research firm Hanley Wood Market Intelligence, referring to any sign that sales may be slowing. He predicts that new-home sales may level off this year.

“Buying a house is half financial and half psychological. People need to feel this is a good investment,” Duffy said. “The moment that psychology changes, people will take a more wait-and-see attitude.”

In Southern California, new-home sales last year rose 14.7% to 68,523. Sales here have increased every year since 1995, when the region was emerging from a real estate downturn. The market hit a low in 1993, when 18,449 new homes were sold.

Last month, sales of new homes in the region rose 22.6% year over year, while sales of existing homes declined nearly 10%, DataQuick said.

Despite the strong month, there are growing indications that demand for new homes may be cooling as well. The number of permits issued for new-home production in California declined in 2005 for the first time in a decade, and builders aren’t raising the prices of new units at the same pace as a year ago.

So far, however, new-home prices have shown little sign of softening. The median figure in California for a newly built home last year -- the price at which half sold for more and half for less -- rose 14% to $439,000, DataQuick said.

A big reason: Builders generally don’t reduce prices anymore -- they simply offer incentives, such as discounted closing costs or interior design upgrades, to help close deals when demand cools, Duffy said.

At the same time, builders have become more sophisticated about managing their inventories. Unlike in the early 1990s, when they tended to construct houses first and find buyers later, builders today prefer to get new homeowners to sign on the dotted line before the foundation is poured.

That strategy has helped to keep California’s housing market booming, as have low interest rates and easy financing.

What’s more, California builders have worked quickly to get houses ready to sell, particularly in such places as the Inland Empire and the San Joaquin Valley, where demand is high because homes tend to be more affordable than along the coast.

In fact, Riverside County led the state in new-home sales last year, accounting for about 1 in 5 sales.

“2005 was the first year in the past few years that supply approached demand,” said Mark Boud, an Orange County-based economist and industry consultant.

Of course, there’s a flip side to strong sales and high prices: a decrease in affordability.

“An increasing number of buyers are being excluded from homeownership,” Boud said, and that could be a factor in keeping sales in check this year.