San Diego County’s new-home prices are escalating faster than in the resale marketplace, causing a slowdown in new homes, said Russ Valone, president and CEO of MarketPointe Realty Advisors.
Valone was joined by Alan Nevin, director of economic and market research at the Xpera Group, to present an economic forecast at a luncheon Wednesday hosted by the Society for Marketing Professional Services.
The average price of a new, detached home in San Diego County is about $800,000, while a resale detached home averages about $450,000, Valone said. At the end of 2012, the gap between the price of resale and new detached homes was $223,459 — and now that gap has reached the high $300,000s.
“What’s the impact of that growing gap?” Valone asked. “Well, I’m the guy looking to buy a new home and all of a sudden I’ve gone from a conforming loan to a nonconforming loan. So I’m now getting stuck with a little bit higher interest rate. And interest rates in the last year have gone up almost one point. All of a sudden the affordability index starts to push us, and that’s why we’re starting to see a slowdown in the new-home marketplace.”
In 2006, there were more than 1,600 projects selling in Southern California; today there are only about 445 — cutting about 75 percent of the production of new projects, Valone said.
There’s a multiplier effect with the sale of a new or resale home, as new owners buy new furniture, improve landscaping and put in the pool they always wanted, Valone said. Nevin added that this happens when people buy homes, not rent apartments.
“In this county, all that’s taking place is apartment [construction],” Nevin said.
About 67 percent of San Diego County’s product is multifamily, which includes condos, Valone said.
“We’re not building a lot of condos — it’s basically all apartments,” Valone said, which will be good business for adaptive reuse and conversions in the future. “What we’re doing today is building the condos of tomorrow at reduced construction costs.”
Resale prices are increasing, causing investors — who fueled the resale housing market in the recent past — to move on.
“Because he can’t make the return on his investment as rapidly as he could do during a time when the market was trending downward, bumping along the bottom or coming back up,” Valone said.
There is an “interesting situation” in the county, Nevin said, where 20 percent of all single-family homes and 43 percent of condominiums are owned by investors.
“And this year they’re going to start taking their profits, and when they do that, that will open up the inventory a lot more and we’ll have a lot more to sell than we have in the past,” Nevin said.
When the investors start selling properties that are mostly renter occupied, they will push those households into the institutional rental marketplace, Valone said.
Nevin agreed, adding that there is are more than 150,000 homes and condos that are investor owned, and when those are sold all of those people will have to find another place to live. The vacancy rate in purchased homes is less than 1 percent, and Nevin warned that “we’re about to go into a crisis period.”
Adding to that group of people will be those who have been living with their parents and are ready to move out.
“As these people, these young folks, start leaving the house, getting a job and getting out, they want to be alone. And we have an abnormally short supply of rental housing geared toward people who want to live alone,” Nevin said.
That will be the next wave of apartment construction in this county, Nevin said, but it is challenging because of the city’s parking requirements. A studio apartment requires one-and-a-half parking spaces, which is about 600 square feet for a 300-square-foot unit.
“It doesn’t make much sense,” Nevin said.
On the commercial side, construction has bounced back, but not as much as some would have liked, Nevin said.
“The reason is because we don’t really have the demand that we would like to see,” Nevin said. “We sure don’t need more office space. Retailing does well, but we don’t need any more regional centers. Industrial, we don’t need a lot of that either. Even though we’re bouncing back, we’re not going to see a real increase in commercial construction.”
Nevin said renovation in both commercial and residential construction is flourishing and will grow. He also said he expects to see activity on the government side in updating infrastructure and continued building for the military.
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