The Morning Report
Subscribe now. Get smarter tomorrow.
Wednesday, Oct. 18, 2006 | San Diego homebuyers have a lot of decisions to make. They have to sift through thousands of homes currently on the market to find the perfect fit at an attainable price. And then they face a slew of aggressive marketing techniques from homebuilders.
Homebuilders responded to the sizzling home market of a few years ago by increasing production to meet sky-scraping demand for homes. Now that sales have slowed, the number of homes sitting unsold on the market has grown. Nearly 30,000 new and resale homes were on the market as of the beginning of October, according to a new report from MarketPointe Realty Advisors. And that doesn’t count the number of housing units under construction – more than 10,000.
The number of homes for sale is up more than 50 percent from the third quarter 2005, and up 135 percent from the same period 2004. Demand for housing was high then, and builders scrambled to keep up. Now many find themselves with more supply than they can sell quickly.
“This cycle is pure supply and demand, just like in musical chairs,” said Jack Haynes, a Countrywide Financial vice president specializing in homebuilder loans, at a local market forecast last week. “The music stops and you have too much supply.”
Indeed, of the unsold units in the county last quarter, about one-quarter were newly built units. That’s about 7,600 brand new homes, sitting unsold. And more than 6,400 of those are in the attached sector – condos, condo conversions and townhomes.
To move inventory of new homes, more and more builders are offering incentives to buyers, like cash rebates or fancy kitchens or landscaped yards. More than 75 percent of the nation’s homebuilders are offering such sales incentives in response to a cooling national market, according to the National Association of Home Builders.
“The impression is growing that builders are getting their inventory under control,” said Peter Dennehy of the Sullivan Group Realty Advisors. “San Diego could be the worst area for them.”
For some homebuilders, the time spent waiting for government approval for new projects may have saved them from even higher inventory levels. Mick Pattison, CEO of Barratt American Homes, said his company currently has only 28 unsold units in San Diego and Riverside counties.
“It’s as much by luck as by judgment – thanks, in part, to our friends in the bureaucracy,” he said.
Like many homebuilders, Pattison was reluctant to outline the incentives offered on those units to entice buyers. But the company is currently offering a number of add-ons for a for a La Jolla townhome complex, according to its website. The features that might have otherwise cost extra include granite countertops instead of standard ones, wood floors, dual-pane windows, and “a very large patio.”
“Builders are using incentives on a national level, on a statewide level,” Pattison said. “I’m not going to sit here and claim we’re immune to that. But what we try to do is make it possible for people to buy.”
In response to home prices more than doubling throughout the county between 2000 and 2005, condo conversions came on the scene as moderately-priced, souped-up apartments available for sale. They made up about 60 percent of the attached homes on the market in the third quarter. Because they’re designed to be lower-priced than other new home construction, condo conversions artificially skew the trend for new home prices – bringing the trend down further than it might otherwise fall.
The county’s 4.4 percent drop in overall median prices was announced last week by DataQuick Information Systems. That was driven largely by a 17 percent drop in new home prices, declining from $498,000 in September 2005 to $414,000 last month.
Conversions may be bringing down sales prices, but they’re propping up the number of sales recorded in the county, said Robert Martinez, market analyst at MarketPointe and the editor of the new inventory report. He said nearly half of the sales in the county last quarter were condo conversions, which helps to explain the drop in median price.
Mike Hall, CEO of Hallmark Communities, another local homebuilder, said last month he’d had to downsize his staff by about half.
“We’re stabilized now,” he said Wednesday. “Sales are slow, and we’re just adjusting to the market pressures.”
And Pattie Walker, vice president for new home sales at McMillin Homes, said the same is true for her company. Despite a decrease in closed sales of 20 to 25 percent this year compared to last, Walker expressed satisfaction at the way the company’s weathered the downturn.
“We’re building per market demand,” she said.
And as for the projects in the “future pipeline” that haven’t yet broken ground, developers will surely be watching these inventory levels closely to decide if and when to move forward with them.
“Everything that has not started development now is under question,” Dennehy said. “You’d be crazy to start too many projects in the next little while.”