Rebuilding in a Different Real Estate Market

Monday, Nov. 12, 2007 | The last time fires destroyed hundreds of homes in San Diego County, real estate fever had the region in a swoon.

It was the heyday, the time of renovating or adding on with dreams of exponential boosts of value. And for some homeowners who’d lost everything to fire, the rising market held promise: a light at the end of the dark tunnel of negotiating with insurance companies and living out of suitcases in apartments or hotels.

To rebuild their homes was to restore their investment in a historic market, where houses’ values could double or triple in value in mere years. That optimism, mixed with easy-to-get financing, led some to augment their insurance payouts with extra construction loans.

The displaced homeowners also had to compete with enthusiastic home flippers elsewhere in the county who were tying up the contractors and laborers needed to help rebuild homes lost in the fire.

In October 2003, the month of the Cedar and Paradise fires, detached houses sold for 56 percent higher than they did three years earlier. And those prices for resale detached homes, measured in the Standard & Poor’s/Case-Shiller home price index, would rise another 40 percent by October 2005.

“A lot of people took the opportunity in 2003 to build a bigger house, a nicer house,” said Peter Dennehy, real estate analyst with the Sullivan Group Realty Advisors. “A lot of those people took advantage of the real estate optimism of the time. Very few people actually rebuilt the homes the way they were.”

Such optimism has faded as the region’s housing market exhibits characteristics quite different from its glimmering boom times, when builders flooded the market with new communities, homes sold sometimes within minutes of being listed, buyers outbid each other in a scramble to secure the property and neighbors watched their own equity rise.

Now, the recent slowdown in residential real estate construction has sparked heavy job loss in the construction industry. But the fire rebuilding process might lend jobs to some such laid-off workers and provide a boost in activity to struggling homebuilders, analysts now say.

When Hallmark Communities, a local subdivision builder, assumed some rebuilding projects after the last fires, it had to divert some attention from its own real estate dreams of new subdivision projects.

“We started out in 2003 with our effort to help the community,” said company owner Mike Hall. “The construction industry was stretched, we were at maximum capacity. … More so in 2004, because the fire came at the last month of 2003. [2004] was our busiest year ever.”

For the last fires, Hallmark dedicated about 25 percent of its energies to the rebuilding effort, Hall said.

But now: “This will be the main focus for our business plan over the next two years,” he said.

In the months following the last fires, Dennehy said, contractors were scarce. And, like Hallmark, homebuilders’ decision to jump in to the rebuilding effort wasn’t to scrounge up work for themselves.

“It was really hard. They were turning down work left and right,” he said. “The market was crazy, it was really hard to get contractors. Today, I think they’d have a different motivation than they would have in 2003. … Building 20 or 30 homes would be a much better shot in the arm than it would’ve been in 2003.”

Ken Henry has built homes for nearly a quarter-century. He was laid off from Hallmark in the summer of 2006 after completing the last of that company’s 50-some custom rebuilding projects for the last fires’ victims. He found other construction work that wasn’t so reliant on the economy’s appetite for new homes — he’s been performing construction maintenance for homeowners associations.

“There’s always maintenance to do,” he said.

But last week, Henry heard from his former employer at Hallmark, beckoning him back to manage the rebuilding effort again. Henry can’t wait.

“I said, ‘Those were some of the best times of my life. Let’s do it,’” he said. “It was extremely difficult but we got through it. … It just felt like I did something good with my life.”

Several in the industry said the last fires carried them a long way up a steep learning curve. Instead of developing swaths of land and carrying materials for dozens of houses on large trucks, the effort to rebuild individual lots is completely different, and often more expensive.

“It’s like going to the dentist or a heart surgeon,” Hall said of the difference in strategy. “We thought we could bring in our production expertise. … We learned how not to do it.”

Where in a subdivision, a company like Hallmark might be able to complete a certain task on eight houses in a day, in individual lot rebuilding it can only do that task on about one or two houses, said the company’s vice president of construction, Tim Marquard. And there’s also a psychological difference in the customer — a family whose home was charred versus Hallmark’s typical customers, looking to move into a new home in a subdivision.

“It’s just a completely different ballgame when you add the frustration of losing the home,” he said. “You almost had to be with these people at least once a week, to understand their concerns. It’s a hold-the-hand management program.”

On the employment side, some dismiss the idea that the fires will draw a line under the job loss in the construction sector. The patch is short-term, said Bob Jertberg, owner and partner of VanBerg Construction, a local custom home contractor.

“It’s going to help, but it’s going to be temporary,” he said. “It’s three years of a bump to the new home construction sector. But it’s nothing like the development craze that had been going on.”

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