Leaner times seen for home builders, but no crash
By: BRADLEY J. FIKES - Staff Writer
SAN DIEGO ---- More work, less profit. That's the near-term future for local home builders, according to Tim Sullivan, president of Sullivan Group Real Estate Advisors, which provides reports and planning services to the housing industry.
Sullivan and his colleagues outlined their view of the San Diego County new-home market to an audience of builders at a Wednesday morning seminar at the Hilton Torrey Pines hotel.
"You've had a pretty good run for five years, but for planning purposes, anticipate profits going down next year," Sullivan told the audience of about 100. Sullivan was referring to the tremendous surge in residential real estate prices.
"Land prices have nearly tripled in five years. Home prices have more than doubled in five years," Sullivan said, referring to the new-home market.
"For the last five years, all we were doing was shoveling product out the door," he said. "All we cared about was building sticks. Now, we have to pay attention to what we're building."
There won't be a crash or a bursting "bubble," Sullivan said. What has happened is that prices have gone up so much that demand has dropped, while competition from existing homes offered for sale is increasing.
Existing detached inventory is greatest in North County, according to a chart shown at the event. Prepared with information from the Multiple Listing Service, it showed five of the six most active detached resale markets as being in North County:
Oceanside's 92057 ZIP code, with 235 listings; Carlsbad's 92009 ZIP code, with 325 listings; the 92028 ZIP code of Fallbrook, with 289 listings; the portion of Rancho Bernardo in the 92128 ZIP code, with 216 listings; and Carmel Valley, with 250 listings. Chula Vista's 91913 ZIP code, the only non-North County part of the list, had 162 listings.
Moreover, Sullivan said, new detached-home production is increasingly skewed toward the top price tier, where sticker shock and buyer resistance is the greatest.
In the second quarter of 2004, 43 percent of new detached homes in San Diego County sold for more than $750,000. In the second quarter of 2005, that percentage had risen to 65 percent.
The need to sell
That means builders are going to have to work harder at discerning what appeals to new-home buyers, and offering incentives to sweeten the deal, he said.
"Costs up, prices flat," Sullivan said, summarizing the outlook. "The implication is: less bottom line."
Costs are rising because of factors such as Hurricane Katrina-induced rebuilding, which bids up the price of materials, Sullivan said.
At the same time, home buyers are more aggressive about bargaining, especially in the existing-home market. That curbs what new-home builders can charge, Sullivan said, because existing homes are generally less expensive.
In turn, that reduced financial flexibility means that builders must be more careful before they start construction, and even be willing to walk away from deals. That is already happening, Sullivan said, something that was almost unheard of until recently. That's because builders know they can't count on automatically recouping costs by adding them into the price of their homes.
Sullivan said builders must go a step further than simply cutting costs and adding incentives: They must make the homes themselves attractive to buyers.
"We have to give buyers a reason to purchase our products," Sullivan said. "They have to be a great place to live, a great place to spend time: It can't just be product."
Sullivan balanced the relatively gloomy market forecast with a list of reasons why the San Diego market is not a housing bubble about to burst. Positive factors include a strong economy, existing equity in homes that helps finance future purchases, and the desirability of San Diego as a place to live.
While the number of active listings of homes for sale has greatly increased of late in the county, Sullivan said the current level of about 15,000 is reasonable.
"If it gets to 45,000, I'll be concerned," Sullivan said.
Contact staff writer Bradley J. Fikes at (760) 739-6641 or bfikes@nctimes.com.
And for those soooo hard to please, go paintball yourself.
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