|September 4, 2008 - Magnolia at Bressi Ranch, Carlsbad CA|
|Slow sales dropping a hammer on builders - "We've come to a screeching halt"|
Full Story - Below
At Magnolia at Bressi Ranch in Carlsbad, about half of the 25 homes have been built and sold for prices approaching $2.3 million. But a few months ago, builder Barratt American abruptly halted construction on six more, and a seventh stands completed and unsold. Work never started on five lots.
The reason: The locally based builder, like many home owners, lost its financing – in this case, a $125 million line of credit from Bank of America on 10 projects in San Diego, Riverside and San Bernardino counties – and is facing foreclosure.
“We've come to a screeching halt,” said Barratt's president, Mick Pattinson. “We're looking for money to pay bills.”
These are desperate times for San Diego County's once-high-flying home builders, who ramped up production of ever-more-expensive homes during the 1997-2005 boom.
Today, virtually no one is showing up at model-home complexes. More than 40 percent of buyers canceled their purchases in July, according to one market research firm. And builders and developers have cut their staffs by as much as 90 percent.
Just a few years ago, this turn of events would have seemed shocking. But in retrospect, it is not surprising given the cyclical nature of real estate. Builders, like buyers, just forgot that the good times inevitably lead to bad times. And this appears to be one of the worst.
“July was absolutely awful,” said Steve Doyle, president of the San Diego division of Brookfield Homes. “It was the worst month I've ever seen.”
At his six projects in three communities in the county, he said only one home out of 30 offered was sold last month.
In response to the slow market, he has cut his staff from 150 to 72 and begun to think about better times, which some analysts say will not arrive for at least two years.
“We're a little more optimistic,” Doyle said. “We think things will start to turn around visibly by the middle of '09. That doesn't necessarily mean prices will move up quickly. It'll probably be 2010 before we see price appreciation.”
New-housing market analyst Sharon Hanley reported 193 sales at 1,090 projects in the county in July, off substantially from the July 2007 count of 639. Just three years ago, the all-time July peak sales total was 1,578. Early indications are that sales in August were up a bit but not much better.
Hanley's other findings for July: a cancellation rate of 43.1 percent, up from 27.4 percent in July 2007; weekly traffic to sales offices down to an average 22 visitors per tract, a record low for July; and 84.6 weeks of unsold inventory, more than double the 35.3-week level a year earlier.
“What's hurting right now is builders can't sell when there are foreclosures only 10 blocks away that are two or three years old,” Hanley said. “So, I think we're going to have to see some clear out of this foreclosure market before these builders can come back.”
Peter Dennehy, senior vice president at Sullivan Group Realty Advisors, said builders competing with foreclosures have to offer financing, interest-rate buy-downs and prices close to those of foreclosures to entice buyers. Upgraded countertops and flooring aren't enough.
“In order to sell in today's market, they need to be priced at very competitive levels,” he said.
According to MarketPointe Realty Advisors, the slumping housing market has prompted many developers to halt new phases of construction or convert for-sale units to rentals.
Analyst Robert Martinez said more than 5,500 units in 71 projects have been taken out of the sales pool since early 2006, most representing former apartments converted to condos and now back to rentals. His colleague, Alan Nevin, said other builders have simply stopped construction until further notice.
“A lot of builders are sitting out there with sales offices and nothing to show,” Nevin said.
His son Jon, a business graduate student at San Diego State University and a MarketPointe staffer, has a one-line piece of advice: “Hold on till the decade's gone.”
MarketPointe's top-20 builder list for the first half of 2008 doesn't include nine companies from last year's list for the first half of the year. In all, there were 1,172 new-home sales from January through June, 55.2 percent fewer than last year.
For some builders, holding on until the upturn leaves lots of blanks on their calendars. They could improve their golf game, play with their grandchildren or, as Mehran Saberi says, attend seminars and industry shows, networking – and commiserating – with other woebegone builders.
“I think it's a great time to get educated about our own industry,” said Saberi, president of Mayfair Homes.
A few years ago, Saberi was flying high with a raft of infill condo projects. But a year ago this month, he halted construction on his 11-story Biarritz project, just west of Balboa Park, when San Diego National Bank declined to enlarge his construction loan.
Until the bank finds a developer who can complete the project, the site remains in suspended animation, the concrete poured only to the second level and rebar sticking out like straws in a summer poolside cocktail. The original sales prices on the 37 units ranged from $1.4 million to $5 million.
Saberi said San Diego National Bank previously foreclosed on his 24-unit Avalon condo project, which included 13 commercial condo spaces; he had just $50,000 in construction left to complete. Last month, he added, Bank of America foreclosed on his completed 25-unit Trilogy on Fifth condo project in Hillcrest when sales lagged projections.
“If banks aren't cooperating, there's not a whole lot developers can do,” he said.
Shirley Norton, a spokeswoman for Bank of America in San Francisco, said that while the company tries to work with builders, when they fall behind in their payments, action must be taken.
“The situation here is that it is a difficult economic environment right now in certain areas and San Diego is certainly one of them,” she said.
Construction jobs in San Diego County have dropped from a high of 95,100 in mid-2006 to 81,300 in July, with many residential jobs giving way to commercial and institutional or infrastructure projects. That doesn't include the thousands of real estate, lending and title-and fire-insurance jobs that have been eliminated, helping boost San Diego's unemployment level to 6.4 percent last month, the highest in nearly 13 years.
Local builders are by nature an optimistic lot who always believe things will get better, if only because long-range population projections suggest San Diego will need 243,000 more housing units by 2030. There are plans on the drawing boards for 1,200 projects containing more than 133,000 homes and apartments.
But the builders also say that when things pick up, the business will be different.
The national builders with deep pockets are unlikely to return, industry experts say, because no large expanses of unbuilt territory zoned or planned for housing remain.
The traditional suburban single-family home will give way to more condos, townhouses and row houses in infill sites.
Rich Gustafson at CityMark Development, which specializes in urban sites, said there may be a supply-demand crunch once builders and buyers are ready to do business.
“My prediction is the market will turn around before banks are ready to lend and because of that, we'll be slow coming out,” Gustafson said. “There will be demand but it will be unfilled because we can't get projects out of the ground.”
Bill Davidson, an upscale builder and winner of many industry awards, said he understands the future will be different.
“The world is not ever going to be like it was,” he said. “We're second-guessing, we're scared.”
Instead of building subdivisions, he's helping banks complete other developer's dreams that have been foreclosed.
“It's no fun,” he said. “It's boring.”