RISMEDIA, July 17 2007—(MCT)–Saddled with a glut of homes, builders in San Luis Obispo County, California, have spent the last year trying to coax buyers back into the market.
They’ve been doing it by offering extras such as Sub-Zero appliances or long-term financing with interest rates of less than 5 percent. In some cases, builders will help sell a buyer’s current home as a way to get the purchaser into a new one.
While those sweeteners have worked to a point, some builders have followed up with more drastic price reductions– as much as $100,000 in certain neighborhoods.
Others are settling for fewer sales in an effort to protect profit margins. With inventory levels dropping and fewer new homes being constructed, builders are hopeful that the local housing-market downturn is nearing the bottom.
New-home sales in San Luis Obispo County are arguably the weakest segment in the current housing market.
“The new-home market has been long on supply, and homes have been sitting for months,” said Ed Steinbeck, a broker associate with RE/MAX Park-side Real Estate in Paso Robles. “There are definitely deals out there to be had.”
Sales of new homes in San Luis Obispo County were down nearly 60 percent in May year-over-year compared to 20 percent for re-sale, detached homes, according to DataQuick Information Systems, a Southern California real estate tracking firm.
The median price for new homes fell in May nearly 14 percent to $525,500 from $609,000 in May 2006. In contrast, the median for re-sale, detached homes actually edged higher by 1.8 percent, to $565,000.
Unlike an individual homeowner who often has the luxury of waiting — particularly in the current environment of low unemployment and historically low long-term interest rates — builders must meet their construction loan commitments. They lose money when a new home stands empty.
After months of focusing exclusively on upgrades and financing deals, some builders have used price cuts to jump-start sales.
Dallas-based Centex Homes, the nation’s fourth-largest home builder, has been among the most aggressive in the county at reducing prices. In February– ahead of its fiscal year close at the end of March — the publicly traded company embarked on a selling blitz.
“We made cuts in every product line in February because we had to make our numbers,” explained Chris Bowley, Central Coast division manager for Centex Homes, which has projects in Paso Robles, Templeton, Arroyo Grande, Atascadero, Nipomo and San Luis Obispo. “We have an obligation to our shareholders.”
Prices in most Centex neighborhoods in the county are more than $100,000 less than they were last summer, said Bowley. The sales campaign yielded results: Close to 80 homes were sold in March, about 4.5 times the activity in a typical month.
“We want to keep the engine running, even if we have to take less profit on a house–or sell it at a loss,” said Bowley. “We can afford to take short-term losses. The negative, of course, is that we are forced to do that.”
Centex is the only publicly traded builder with homes in the county.
Selling property — even at a loss — is a decision that privately held JM Development has also made. The Santa Barbara-based developer, which has properties throughout the Central Coast, has dropped prices by about $80,000 at Petersen Ranch in Templeton, said company President Mike Rider.
SOURCE: DATAQUICK INFORMATION SYSTEMS
Home prices start at $490,000, down from $570,000.
“We’re trying to be more realistic about pricing,” said Rider. “We’ve already closed more homes in six months than we did all last year, but we’ve also lost more money than we did last year.”
Like Centex, JMDevelopment initially began by offering incentives. While those worked for a while, “they eventually became ineffective because everyone was offering them,” said Rider. That’s when the company moved to significant price cuts and was able to sell
much of its inventory. Rider estimates that 20 of 43 homes at Petersen Ranch sold so far this year were below the cost to build them.
Fewer but profitable sales
Other private builders in the county have resisted fire sales. They continue to use incentives as a major enticement, protecting profit margins as much as possible, even though it may mean fewer sales.
Atascadero-based Midland Pacific Building had success with its Home Buyer’s Advantage program, which guaranteed buyers that if their existing home did not sell within a certain time period, the company would purchase the property for 90 percent of its appraised value. Reed Harris, vice president of development, said the program helped to drop their inventory levels significantly. He notes that Midland has been able to stave off huge price drops.
“We are careful at how we price the product,” Harris said. “I may have sold three homes one month when my competitor sold many more, but I made money.”
BDC Development Corp., a Pismo Beach-based building and development company, is putting $30,000 to $40,000 in upgrades into its homes at Kingfisher Canyon in Avila Beach. Features such as appliances and wide-plank wood floors have become standard.
“Raising the spec level has been an incentive that helps close the homes we have and keeps sales at a steady pace, which is still very slow,” said Eron Loughead, who is a partner with his brother Jeff in the company.
BDC also joined with Pottery Barn to showcase its home furnishings in a Kingfisher model home. Buyers can purchase the house with the furniture.
Being a private company has helped BDC, Loughead said.
“We can stop supply, as we don’t have to put up a phase within a certain time frame or cut prices to keep up the sales volume,” he said.
Of course, he notes, BDC lacks the kind of access to money that Centex or other publicly traded builders enjoy.
To ride out this downturn and reduce risk, BDC has increased the work it does for clients, which Loughead says has minimized labor cuts to 7% to 10% over the past year. That’s in line with the cuts that Midland has made but just a fraction of the 50 percent decrease in staffing that Centex has taken as it begins to close its Central Coast division.
Builders predict that the housing slump for new homes may be reaching the bottom.
Inventory has come down from its peak, and most builders are balancing supply so they are releasing enough homes for potential buyers to look at, but not more than they need.
Permit activity on single-family residences in the county is down sharply this year to an average of 63 per month, compared to 106 in 2006, 135 in 2005 and 158 in 2004, according to the Home Builders Association of the Central Coast.
Centex’s Bowley thinks Centex has found the right prices for its properties for current market conditions as evidenced by the company’s recent sales activity. During the second quarter, Centex sold 140 houses in the county. That compares to 210 homes sold in all of fiscal 2006. Consequently, Centex is nearly sold out of every one of its neighborhoods in the county except at Dove Creek in Atascadero, where it plans to build the second half of the 270 lots.
JM Development’s Rider said the company intends to complete its Petersen Ranch project this coming year, putting up an additional 24 homes.
“But we’re waiting on what we don’t need to build,” he said.
Like everyone watching the real estate market, builders are looking for positive signs of improvement. Steinbeck of RE/MAX Parkside Real Estate says he sees signs of firming, but there is little consistency.
BDC’s Loughead expects the new home market to remain quite stagnant for the next six to 12 months. He doesn’t anticipate huge price drops or a big pick-up in sales in the market. Neither does Rider.
Copyright © 2007, The Tribune, San Luis Obispo, Calif.
Distributed by McClatchy-Tribune Information Services.