Are Orange County homebuilders over-supplying the market?
Rising mortgage rates will reduce sales volumes on new construction and prompt builders to offer more incentives and prevent them from raising prices.
Homebuilding usually leads the economy out of recession. The Great Recession did not end with a building boom largely because of overbuilding during the housing bubble. A false price signal triggered excessive homebuilding, and it took five years to work off the inventories.
The collapse of the housing bubble saw new home sales and construction fall to the lowest levels ever recorded — and those records go back to the 1960s. To make matters worse, rather than experiencing a sudden drop and a “V” bottom leading to a new boom, new home sales flat-lined at record lows for five straight years. This basically wiped out the homebuilding industry.
A few years ago, I heard the Riverside County manager of KB Home quip, “I’m building 10% of the homes with 10% of the staff I had in 2006.” That’s no exaggeration.
Back in October of 2012, I reported that restricting MLS inventory is reviving homebuilding. The premise was simple: as lenders created a shortage of supply, homebuilders were ramping up to meet the demand. Of course, this creates it’s own problems as reflating the housing bubble sends homebuilders false signals.
Government and lender solutions to the collapse of the housing bubble focused on loan modifications and short sales. Back in 2011 when banks went “all in” betting on success of loan modifications, it was widely believed that loan modifications would reverse declining house prices and make distressed borrowers happy by keeping them in houses they couldn’t otherwise afford. This in turn would cause home prices to bottom, put homebuilders back to work, which would improve the economy by increasing employment and private-sector spending. It has worked as planned. Or has it?
Homebuilders responded by building homes almost exclusively for the move-up market as few first-time homebuyers had a good job, available down payment money, or good credit to buy a house. Now that the bottom is apparently in, homebuilders are ramping up production again, but they may be overbuilding, particularly considering the weak demand, which is almost entirely predicated on low mortgage rates.
Here are 6 major projects underway in O.C.
Construction will kick off this year at Marblehead, the coastal stretch of property in San Clemente slated for 309 homes, decades after the planning process began.
Across Orange County, homes are going up this year on sites ranging from a former auto mall in Foothill Ranch to the latest development in the Great Park Neighborhoods in Irvine.
“We’re seeing a surge of new home construction supply in two areas: Irvine and South County,” said John Burns, an Irvine real estate consultant.
The median price of a new home in Orange County hit an all-time high of $867,750 in December, CoreLogic DataQuick reported.
This is because the homebuilders are almost exclusively serving the move-up market.
Homebuilders are putting properties on smaller lots – responding to demand for open spaces where residents can walk or ride instead of big, private lawns, which make the communities higher density, Burns said. …
That’s not the real reason they are building on small lots. Homebuilders are maximizing density to get the largest number of units per acre to maximize their profits.
Here are six of the major projects underway:
The first phase of the largest residential development underway in Lake Forest, Baker Ranch, opened last year off of Bake Parkway. Six neighborhoods encompass more than 500 homes, of which about 350 have sold.
More than 50,000 people have visited the development since it opened in February, according to Seth Ring with Toll Bros., the homebuilder along with Shea Homes.
They only managed to sell 350 houses to 50,000 visitors? Not the best closing rate, is it?
(See: Baker Ranch in Lake Forest)
The first Great Park Neighborhoods community, Pavilion Park, opened in 2013.
Those 726 homes, distributed through 10 neighborhoods on the northern edge of the Orange County Great Park, are nearly sold out.
Next up is Beacon Park, which is directly adjacent to the Great Park and south of Irvine Boulevard.
The 10 neighborhoods that make up Pavilion Park are just east of Sand Canyon Avenue, at the intersection of Irvine Boulevard and Ridge Valley. Prices range from the $700,000s to from the mid $1,000,000s.
The 6.9-acre property at the corner of Auto Center and Towne Centre drives will have homes from 1,776 to 2,275 square feet with three to four bedrooms and a two-car garage.
Five floor plans are proposed, each with a private side yard.
Plans call for a 9,331-square-foot recreation area with a pool, gardens, fireplace, children’s play areas and other community amenities to go up near the main entrance to the site.
Prices for homes in the community, which will be gated, will start in the high $600,000s.
(See: Camden Square in Lake Forest)
Rancho Mission Viejo’s first neighborhood, Sendero, has 125 homes left for sale of the 941 built in 11 neighborhoods. That includes the Gavilan community, an age 55-and-older enclave.
The next neighborhood will be known as Esencia, three times the size of Sendero, expected to open in the fall.
A total of 2,700 homes, plus an apartment complex, are slated to go up on 860 acres east of Sendero in a series of neighborhood terraces. Some have views of the ocean. Neighborhoods will again include plans for residents 55 and older.
Although prices and home plans aren’t yet available, the community will include a K-8 Capistrano Unified School District campus, clubhouses, parks and playgrounds and open space for hiking.
Rancho Mission Viejo was listed as the top-selling new master-planned community in the state last year.
JEFFERSON PLATINUM TRIANGLE
Construction began earlier this month on a 400-unit luxury apartment complex near Angel Stadium, the second to mark a revival of Anaheim’s stalled Platinum Triangle residential and commercial development.
Monthly rents for the Jefferson Platinum Triangle project will range from $1,815 for a 590-square-foot studio apartment up to $2,749 for a 1,377-square-foot, three-bedroom unit.
The 820-acre Platinum Triangle development plan was approved in 2004 to include a mix of shops, offices, eateries and condominiums. …
SEA SUMMIT AT MARBLEHEAD
The San Clemente parcel, known for decades as Marblehead Coastal, is the last big coastal stretch in the county.
The 309-home development will encompass four neighborhoods – Azure, Indigo, Aqua and Sapphire – with homes from 1,785 to 5,000 square feet.
Nearly 4 miles of public trails will meander the property.
An 8-acre soccer park with a basketball court is in the final planning stages.
The homes are expected to sell from the low $1 millions to low $3 millions.
Builders are not overbuilding
While the abundance of new home construction might thin the margins, due to the chronic shortage of supply in Orange County, the new houses will eventually be sold. Unless we get a larger source of must-sell inventory, prices won’t go down; however, what will happen if mortgage rates rise in 2015?
Homebuilders need both price and volume
Homebuilders celebrated when prices went up because their costs were fixed, and they made more when they sold the units; however, now when they go to buy lots to construct more homes, the cost of those lots reflects the increased value of the houses they plan to build on them. The higher prices mandated by their lot costs puts these homes out of reach of most buyers, so they still get their high prices, but they can’t sell volume at the higher price points.
In our new era marked by the absence of unstable affordability products, high prices mean low sales, and unlike the past, there is no way to suspend this law of supply and demand. Today’s high prices may benefit bankers and existing homeowners, but it’s a disaster for homebuilders because they simply won’t be able to sell enough homes to meet their financial projections. Further, this problem will only get worse as interest rates rise and prices become even less affordable.
I believe 2015 will see significant incentive pricing and slow sales. Rising mortgage rates will reduce affordability, and this new supply will simply sit there. Perhaps the influx of Chinese cash will keep the party going, but if that source of demand dries up, 2015 will be a long year for homebuilders.