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Wednesday, June 7, 2006 | As the number of homes for sale in San Diego County continues to escalate and sales levels remain stagnate, the county’s builders have begun to slow the once-rampant pace of new home construction.
Some of the largest construction companies building on San Diego’s outskirts and in its core have begun to reduce the number of homes they are constructing at any time, a trend that could impact a regional economy that has thrived with the help of the booming real estate and construction industries. Countywide, 2,836 residential building permits were issued in the first quarter of 2006, compared to 4,818 in the same period last year – a 41-percent decrease.
“Some of the consumers have held off a little bit, and as a result, homebuilders are mirroring that and slowing their process down,” said Paul Tryon, CEO of the Building Industry Association in San Diego.
Tryon said builders are not likely to cancel projects altogether and sell off any land for reduced prices because land is so scarce and so valuable in San Diego. Rather, companies will continue building at a slower, more measured pace, he said.
That’s the approach Paul Barnes, president of the San Diego division of Shea Homes, said his company will be taking. Barnes said some Shea projects have been tremendously successful but others have seen slower sales. Barnes said his company has slowed production in projects that have seen slow sales, though he didn’t offer details on specific projects.
Barnes said slowing production doesn’t mean that each day carpenters hammer fewer nails or bricklayers lay fewer bricks. It means that project managers do not rush to produce their maximum potential number of properties, opting instead to build fewer homes in the same time period.
“A year and a half ago, you may have built to the point where you’d be delivering, say, 72 homes a year and now maybe you’ve cut that back to 50,” he said.
However, the new trend does mean less demand for construction workers and tradesmen.
That’s a real concern for Tryon, who said builders can sustain a slowing demand for a while, but not in the long term. Tryon also said some local builders who have bought up overvalued properties in recent months may struggle to turn those projects into profits in the softer real estate market.
The slowdown in construction also worries Alan Gin, a professor of economics at the University of San Diego’s Burnham-Moores Center for Real Estate.
“A large portion of the job growth that we’ve had over the last several years has been real estate-related, so there’s concern that as things slow, a large part of that job growth could be taken away,” Gin said.
Gin cautioned that a slowing of the residential construction sector could have many ripple effects for the local economy. As new homes are built in the county, he said, people move into them from older properties. Those older properties then go on the market and are picked up by other homebuyers in the area. At every step in the real estate chain, there are several players, from mortgage brokers to interior decorators, who stand to lose from a decrease in new construction.
“[New residential] construction sets off a cycle where everybody is moving up in the housing market. Without these new developments, there’s going to be less of that going on,” he said.
Gin said there has been some shift from residential construction to commercial construction, which will help the industry to continue ticking.
The value of commercial construction permits has increased notably since 2005. That doesn’t do much for the thousands of Realtors and mortgage brokers in San Diego who buy and sell residential real estate, however. In addition, Chris Thornberg, a senior economist at the University of California, Los Angeles Anderson Forecast, cautioned against reading too much into commercial building permit application statistics.
Commercial building permits, unlike residential permits, are measured in dollar amounts, not simply in the total number of permits issued. Because construction costs have skyrocketed in the last few years, Thornberg said, the same amount of construction now costs much more than it did a couple of years ago, so while more money is being spent on permits, there’s not necessarily that much more building going on.
“It’s clearly up, but we’re talking just the last couple of quarters and I’d be careful to read too much into it,” Thornberg said. “In general, residential is much more labor-intensive than commercial, so is it enough to make up the difference? I don’t think so.”