Questions for Paul Tryon

Saturday, Oct. 21, 2006 | The issues surrounding housing affect everyone in a region. And in San Diego, the state of the housing market has a lot of people worked up – residents, real estate professionals, mortgage brokers, economists and construction workers. About as many sides to the story exist as people involved.

Paul Tryon speaks for the people drawing up the plans and hiring people to swing the hammers for new housing units in the region. As the CEO for the Building Industry Association, Tryon represents 1,500 builders and developers in San Diego. Originally from Northern California – “You don’t grow up in San Diego, you move here,” he says – Tryon worked around the state Legislature and the BIAs of Northern California and Los Angeles before moving to Escondido in 1992.

Tryon sat down with voiceofsandiego.org at the BIA office in Kearny Mesa to share his take on the current housing slowdown and the industry’s perspective on the affordable housing regulations in the region.

These days, in a slowdown on the residential side in San Diego, or a softening of the market, how does that compare to some of the other downturns or the slowdowns that San Diego’s seen in the past?

I think previously, slowdowns were more greatly impacted by the general state of the economy. … In the ’70s and in the ’80s … even into the early ’90s, they followed periods of substantial supply, maybe even over-supply in the housing market. …

Just the opposite’s occurred here. We have about an 88,000, a 90,000-unit deficit. California as a whole has a deficit of, essentially, a million units, just to get to the national standard of homeownership. We’ve undersupplied the market, so we don’t have that growth of new home inventory.

I think the one thing that is also different is housing prices are so substantially higher than incomes – that they’re far greater, from a proportional scale, from any of the other recessions.

With that disparity between income and home prices, do you think that home prices will come down to more attainable levels, or will people have to use creative financing to get into those homes? I know that the BIA and the (San Diego) Association of Realtors have partnered on an ad campaign for the American Dream of homeownership. How possible is that for your average family in San Diego?

Well, I think it’s still very possible. I mean, the message is there that the fundamentals in our economy are still good. I mean, this is the [eighth]-largest city in America. I mean, you look at the size of our county, there’s 3 million people that call this county home. There’s a need for housing. … There will be an opportunity to be a homeowner within this environment. We have nearly a million homes that are on the resale market, that already exist within San Diego. We will continue to add to that over time. There will be a demand for housing. …

Will we go through a period, like we are right now, of moderation, of some correction to the rapid increases and the appreciations? Yeah, I think we probably will. But I think we’ve got to be very careful we don’t confuse that with previous times with adjustments in pricing. …

If you look at how many housing permits we provide in this county for a 3 million population – I mean, it’s a drop in the bucket. We add – what, 1 percent every year to the housing stock? We don’t keep pace with the growing community’s needs and that’s why you’ve seen such a pressure on pricing.

I’m afraid we sort of institutionalized that as a part of San Diego, of California. We have to remember that, this is not new in its making. The run-up in prices, the limited supply that was out there – you wouldn’t know it now because you’re beginning to see inventories out there, especially in the resale market, and that would lead you to believe, ‘Oh, we have adequate supply of housing’. I think this is a short-term aberration, but it doesn’t deal with the long-term issue.

In fact, I think we have this glaring clarity that when you undersupply the market and you do so for an extended period of time, you have such a run-up in prices that you end up with the problem with people’s ability to afford your product. And that leads to, at times, temporary inventories. And it’s really a price challenge that we have in San Diego, in California.

You have to remember that, you know, 30 years ago, if you measured California’s housing prices against a national standard, we were almost exactly identical. The national standard was just a little bit less, the average. And if you looked at the median incomes, we were, again, essentially on par with the national standard. Now, 30 years later, we’re still roughly on par with the national standard for incomes. But we’re, how many percent? Three hundred percent of the national standard for housing? You know, it took us 30 years to get in that position. Despite what anyone says, there’s not any sort of immediate course correction that’s going to make that substantially different.

So what are some strategies, then, from a BIA perspective, that builders will be doing or will be forced to be doing, so people can start to afford those again?

Well, I think you’re seeing more attached product opportunities. Historically, that’s been a part of San Diego’s history. If you go back and look at the ’70s and the ’80s, it was about half single-family and half multi-family. … Once again, we’ll be seeing attached housing as a point of entry, as a lifestyle choice, as a more affordable choice.

Do you think that signifies San Diegans starting to change their preferences? Like, ‘I want to own a home in San Diego and that can look like a condo in downtown or a condo conversion in East County’?

Well, I think it’s driven by two things. I think there’s a change in the consumer’s desires and wants, and our ability to satisfy that. We often less drive the market than we respond to the market. …

We now have a more vibrant downtown than we did 10 years ago, five years ago, 20 years ago. … You’re seeing the consumer make a lifestyle choice that’s … a better alternative than, say, driving to Murrieta for the “affordable” single-family home. “Affordable” – I use that loosely. But, you know, the white picket fence and the two-car garage and the yard for the kids. I think there’s a lot of consumers that see the absurdity in making that drive. I think we’re going to see people with a desire to stay in San Diego. …

I think the one area we still need to ask ourselves is, why aren’t more apartments being built? It’s because of the economics of that. They just don’t make economic sense. And I think we’re going to have some challenges as a result of that. Find a way to get back into that business, because we really don’t build that many apartments and that’s a big challenge.

As far as that’s concerned, you know, seeing a need in a market that doesn’t make economic sense, what balance does a building company have between a desire to help make San Diego a better place that more people can live in, and the bottom line? I mean, I know you’re businesses …

Well, I think most of our industry does hold that sense of value. You build a lot more than structures. You build a lot more than that individual’s home, while … there’s definitely that sense of … intrinsic pride with that. But I think increasingly, our industry doesn’t just build the structure or the home. We build the community. You have a responsibility when it comes to building parks. And we build schools. … We’re definitely tied to the social health of our community, the public health of the community.

We recognize that to be successful businesspeople here, that has to be the case. We do own that sense of social responsibility. But I think it also has to be recognized that we’re the producers of a product. We’re a business. Just like any other business. We have to be profitable. It has to make economic sense. …

We have limitations on our ability to, sort of, solve society’s challenges. … We can do so much, and you know, I think we only have an obligation, morally, to do so much or socially, to do so much. And beyond that, we want to be corporate citizens and we want to be part of meeting those other challenges. But I think, increasingly, we’re seeing the social burdens shifted to our industry, to solve those as well, and I question that we have the capacity to do that and I don’t think it’s going to work if we do that. …

You can’t lose sight of the fact that we, we’re just builders. You know? We do have a deep commitment to the community … but I don’t think that should be confused with reaching over to social responsibility that reaches beyond what producers of a product have an ability to do. …

Increasingly … that burden has been shifted to us, and ultimately, to our consumers. That’s part of that shift that occurred in the last 30 years. … What’s different? A heavy regulated industry, a high-cost area. …

Are you talking about the in-lieu fees, the fees developers have to pay into the affordable housing fund or the inclusionary housing?

Things like society’s need to deal with subsidized housing, affordable housing for those of lesser means, I would argue that is a broad societal concern. When you have so many people on the Section 8 waiting list down at the Housing Commission that they no longer take applications because it’s years of wait … when you have people struggling, legitimately, to make rent or to make their mortgage payments and, you know, that affects not a few, but a lot of people in San Diego, I would argue that those are broad societal concerns. We need to recognize them … as a society, as we would with so many other things that we hold important.

And when it comes to subsidizing people, we look at things and we say, yeah, there’s a responsibility in these areas, I think, to your fellow man, to provide some support for people that need it, but it’s an unusual model we’ve decided to create with these inclusionary fees and so forth. Our customers pay more for their house so that they can subsidize their neighbor’s home. It’s an odd delivery method. … One, it’s inefficient and it’s not enough, and I’d argue not fair.

But beyond that … when people have a need for food … we don’t ask Vons to give away a certain amount of food directly as a supermarket provider. … We have a collective, broad government program that we all contribute to to meet those needs. …

And yet, with the concept of inclusionary, that’s exactly what we do – we say, for every 10 houses, I want you to give away one house for less money than it costs to build it. And people forget that the only way we can do that – we have to have income come in from somewhere – is from the other products that we sell or rent.

We may add 1 percent to the housing stock every year, but if it’s a broad societal concern, is it appropriate to ask 1 percent of your population to be, in the case of San Diego, the sole contributor? I would argue it isn’t.

What will the industry face in the coming year? How will 2007 look different than 2006?

Two-thousand and seven has the opportunity for an improvement in the market through the beginning of the year, once we get through the winter months. …

I think there will be far less condominium conversions on the market as an alternative. I think we’ll still be challenged to provide new apartments. I do believe there’ll be pressure on rents on existing apartments. Our downtown market will probably produce fewer new constructed units in this next cycle. I think we’ll be challenged by increased government regulation on what we do build, in the sense of fees and costs. We’re seeing that now. …

What’s morale like among builders?

Well, I think morale is challenged a bit. But homebuilders, by their nature, are a pretty resilient crew. … They recognize that they struggle to deliver a product that people can afford to buy. … San Diego is a tough place, a high-cost place to do business, and many of our national builders will not be major contributors to the housing market in 2007. …

[The government] can’t continue to lament that we don’t provide enough housing, and give nothing to improve our condition, in fact, we won’t even stop making it worse, with fees and with regulations and restrictions. … You first have to stop making it worse before you can start making it better. …

But there’s a lot to be optimistic about in San Diego’s future, as well. Because I think there’s some recognition growing. I think we have a mayor of San Diego who’s recognized that housing is important, socially and economically, and we’re encouraged by that.

– Interview by KELLY BENNETT