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| Hangin’ in the OC |
| Written by Jonathan Smoke | |
| 05.30.2008 | |
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Discuss this article on the forums. (0 posts) I enjoyed the opportunity to go out west this week and visit with Patrick Duffy of Metro Intelligence and HousingChronicles.com and Southern California developers and builders. I also participated in a one-day builder conference sponsored by Hyphen Solutions and Professional Builder. My friends from Hyphen invited me to speak about my experience in implementing technology to improve efficiency and effectiveness of home builders. And then they let me partner with Patrick in delivering a state of the market presentation on Orange County, which was the venue for the conference. For those unfamiliar with “the OC,” Orange County is an upscale county in the Los Angeles-Santa Ana-Long Beach MSA. How upscale? Take a look at the consumer groups that make up their new home demand. Check out the existing home value distribution as of 2007. Compared to my hometown of Atlanta, Los Angeles is ground zero for post bubble housing malaise. Home prices have fallen dramatically along with sales and new home construction. I flew into Orange County the day after S&P released the March Case-Shiller price indices, which showed that existing home prices were down year-over-year 21.7% in Los Angeles. The housing picture is ugly in the OC. Looking at Median Home Prices, if you had purchased a median priced home at the peak of the market, you’d be down almost $100,000 as of March. The median home price is currently in the low $600’s. New home production has tanked. Single family permits were only a third of their prior peak in 2002, and the decline is not abating so far into 2008. Prices are down, sales are down, production is down. Is there any hope for the future? Sure there is. Patrick gave an excellent overview of several best-selling communities that are performing well in the market. What’s their secret? Good locations. Correct pricing. And products well designed for the target demand in the area. There is ample demand for new homes in Orange County. It’s simply sidelined by fear of further pricing declines and a lack of readily available credit. Mortgage originations for new homes in Orange County are down 75% since 2005. Of course you can’t prove that lack of credit is the reason for the decline, but it’s definitely a contributing factor. We know that demand has not lived up to expectations because we can compare our proprietary estimate of demand to the actual last 12 months of sales. Our demand numbers represent what demand should be in normal market conditions. We factor household formation by consumer segment, ownership rates by segment, trends in ownership, and structural replacements. We can’t account for negative psychology—there’s simply no reliable historic data with enough granularity to line it up with the rest of our data. At all but the $450,000-500,000 price range, demand has not lived up to expectations. And that’s one more reason for hope. The demand is there. Households are still forming. The economic fundamentals are strong. Ownership has actually started to increase again because affordability is improving. I’ve heard many “housing experts” describe the housing boom in these bubble markets as simply moving forward demand that would have materialized in future years. So, we’re now three years past the peak. The demand analysis may be showing us that we’ve worked through the borrowed demand and are now pushing demand into future periods. The future when things start moving again will be when home prices have stabilized, credit is more available, and consumers are more confident. When that happens, we’ll see a surge in sales and likely new home production to work through the pent-up demand. So to my new friends in the OC, hang in there. Follow some of the advice you heard from the conference. Focus on knowing your customers. Invest in changes to improve products and processes. Get as lean as possible to survive, and then come back with a vengeance! How long will this take? The home price indices are not sending encouraging signals, but they are 30-60 days old and may be overly influenced by sales of foreclosed homes. At least on the listings side of things, it would appear that the conditions are stabilizing. The median listing price for the LA MSA has been bobbing along between $670,000 and $680,000 for 5 months now. This is a leading indicator of what will be reported in 60 – 90 days. The average days on market for listings have also declined and have been under 100 days for three months now. Yes, I know that’s still ugly, but it’s not getting worse. Finally, inventories of single family homes have fallen back to the levels of a year ago. If the demand is there, and I believe it is, these are encouraging signals. And remember, there are communities selling well now. Time to make some lemonade? 
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