Cover Story
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Are you a savvy homebuyer?
When to buy, when to sell and when to reach for the sky.
By Craig ReemPublished: May 22, 2008
Nathan Buckley noticed that the “negativity was just starting to brew” when he and his wife, Michelle, decided to get out of Corona, where they owned a home, and move to Orange County.
Nathan, 30, and Michelle, 24, rented an apartment for six months before buying a new two-bedroom, two-bath detached condominium in the Woodbury community of Irvine in late 2006.
“I could have waited another six months,” Nathan recalls, “but then I would have been in an apartment. It’s just another delay.”
Instead, the couple was in the right place to expand their event-planning business, Mint Julep Social Events, and adopt a bustling social life that they found lacking in the Inland Empire. “It’s the only place I’ve lived where I’ve made that many friends so quickly,” he says.
The Buckleys are among a cadre of homebuyers who have bought in a tough market, and made business and lifestyle decisions that made sense to them. And, most importantly, they represent a changing dynamic in the market – people who are not investors. “I didn’t buy it to flip it; I bought it to live in it,” Nathan says.
Orange County’s population of 3.1 million is affected by housing more than any other economic indicator. The mortgage industry, now decimated, had a huge imprint here. But homebuilders have a huge stake. And they remain, building homes, and innovating, and listening to the consumer. Support industries, such as construction, architecture, planning and land development, derive their livelihood based on whether you are a homebuyer or a seller, a move-up buyer or an anxious first-timer sinking your life into the biggest investment you’ll ever make.
And, as everyone knows, the news has not been good. Orange County, like the rest of the nation, is having a fitful time. DataQuick, which tracks new and resale homes and attached properties statewide, reported the slowest March since it began keeping score in 1988 (the April numbers are being released about now). While statewide sales were up nearly 20 percent from February, they were down more than 38 percent from March 2007. In Orange County, 1,663 homes sold in March, nearly one-half the number from a year ago.
That said, the market is warming, as there is rationale for being in the market. For example, according to DataQuick, the median price for an Orange County home is $506,000, down nearly 20 percent from a year ago, when $629,000 really took your breath away. Qualifying for a mortgage has become much harder, but that is making qualifying more of a science than the Wild West transactions of subprime and no-stated income needed. Translation: If you can qualify, you have a reduced chance of joining the foreclosure crowd, many of whom moved into homes with no money down and no way to pay escalating monthly payments.
The Buckleys are among those new homeowners who have carefully charted their lives. Their business, mostly run out of a home office downstairs, has expanded into Beverly Hills. And, as Nathan notes, it may only be children – an expanding family – that will get them to budge. “We may have to look at something bigger in six years.”
For those in the market now, homebuilders are being more generous with incentives and amenities. The mantra that began circulating in the early to mid-1990s, the last time the market went south, is being heard again: Now may be a great time to buy. If so, there are several thoughts to consider, from location to commute, from size of home to the length of expected stay.
OC METRO Business Magazine’s Cover Story is a primer for those who are in the market, or considering a move this spring, summer or fall.
Where to buy
The foreclosure wave that has hit Orange County, along with $4 per-gallon gas prices, makes choosing where you want to live a particularly multi-dimensional event, says a longtime housing expert.
With foreclosures and mortgage defaults playing a role into the first quarter of next year, being aware of the neighborhood you want to call home is important, advises Walter Hahn, an Irvine-based real estate consultant.
“The first thing I would advise is the same thing I’ve said for 40 years: Buy a home in decent condition, in a stable neighborhood, one that is not going downhill,” says Hahn. “Today, really factor in what is not going downhill because of foreclosures.” Empty, abandoned houses tend to blight neighborhoods, he says – there are and will be many of them. He projects 8,000 foreclosed homes in Orange County this year, 12,000 in 2009, and 10,000 in 2010. “It’s a huge leap everywhere that started the second half of last year.”
Cities hit particularly hard with foreclosures are Santa Ana, Anaheim, Buena Park and Garden Grove, he says. And there are limited pockets in South County. Cities and areas much more immune to the trend include coastal areas, Irvine, Rancho Santa Margarita, Anaheim Hills, Yorba Linda and Brea, he says.
“If you are looking for a real low-priced home, $400,000 or so, you pretty much have to look in the zip codes where there are foreclosures,” Hahn says. “If that’s all you can afford, that’s where you have to go.”
While he believes the selling prices of existing homes “have a ways to go down,” it’s not so with new homes.
“They appear to have bottomed out. New-home prices are at, or very close, to the bottom now.” Within new communities, homebuyers ought to rank the school district if children are part of the family; buy a home the farthest from a busy street or freeway; and look for a floorplan and lot size you like, Hahn advises.
Once location and price have been ironed out in the homebuying search, Hahn says to carefully examine the real cost of the commute: “This is factoring more and more into people’s decision about where to live. Time has always been a factor, and now, cost has increasingly become a factor.”
Homebuilders putting up condos and townhomes near job centers may find their timing perfect, Hahn says.
This is a trend that may have growing appeal for both lifestyle and cutting transportation costs. There also is a boomlet in live-work homes, with home-based businesses a growing option for workers. In Anaheim, for example, Harbor Lofts, along Harbor Boulevard and Center Street Promenade, is a group of two-story townhomes by Lee Homes and CIM Group.
“Whether retail, professional services or artist’s studio, these live-work townhomes are perfect for a variety of businesses,” says Marilyn Costner, a sales representative.
Demographics
While high-rise living in Orange County is still very much in flux, the aging population may be drawn to areas along the Jamboree Road corridor in Irvine and the planned Platinum Triangle in Anaheim. The former is where high-rises are now up or going up, and in the latter, as many as 35 towers may be built over the course of the next several years. An aging workforce could change how we build homes, and that might mean denser, smaller and higher.
Orange County’s median age is 35, but that is quickly skewing older, according to the Orange County Community Indicators, a document released each year that defines who we are. The report “shows how the county is changing, and how we compare with peer regions in terms of our economy, education, health and well-being, safety, environment, and civic life.” Young adults, ages 25 to 34, are declining, as many in that age group seek other places to live where housing is less expensive, the report indicates. The population of future homeowners, those 15 to 24, is growing modestly. This is the age group one can assume will be populating more urban-centric locations in the future, living alongside an aging population who may also prefer an active lifestyle.
How will we live? That brings back the viability of the high-rise in O.C. and urban communities that densely build attached dwellings, such as Central Park West in Irvine. The project has marketed to the foreign-born business people who want to live actively near work and empty-nesters.
As OC METRO Business Magazine reported in 2000, Baby Boomers – those 76 million Americans born between 1946 and 1964 – will influence the housing market nationwide as they redefine senior housing. As we wrote then, “For a generation that was born in the shadow of World War II, grew up with Eisenhower and Kennedy, got a whiff of pot, fought in Vietnam, flitted with communes and suffered through the music of the ’70s, beware anyone who tries to build a compartmentalized village. Levittown won’t do.”
Now, with the oldest boomers turning 62, these homeowners will affect building for years to come, from mega-projects such as Rancho Mission Viejo’s Ranch Plan and Lennar’s project (the Great Park Neighborhoods) at the former El Toro Marine base, to smaller communities. And that may already be taking place; according to the Community Indicators, some 51 percent of the county’s 1.025 million households are single-family detached, but those types of dwellings – primarily known as suburban enclaves for families – are dwindling.
What is built in the next seven years, up to 2015, will greatly define future housing in Orange County, as the report notes that those 32,500 newly built homes will represent 42 percent of all new county housing built by 2035.
Employment, with about 1.6 million people on an O.C. payroll, is expected to grow faster than the county’s ability to build homes, putting upward pressure on housing prices and raising the average household size, which is now at 3.1 people. As the report noted, the preferred ratio of jobs to permits is 1-to-5, and in Orange County, it is now 3-to-5, the highest in the state.
With Orange County’s 798 square miles, including 42 miles of coastline, there are pockets of dense, urban land use surrounded by permanent open space.
Buyer beware
As the summer crowds begin to turn an ashen Orange County home market into something a bit more robust, make certain you have the ammunition you need to make the right decision. It’s not only a question of which home you will buy, but how much, where and why.
David Buckingham Smith, a Realtor with Seven Gables Real Estate in Tustin, offers 12 tips and observations.
• This may seem like a natural in light of the subprime meltdown, but Smith is continually worried that the homebuyer isn’t paying close enough attention to the most important detail of the sale, which is the mortgage. “Make sure you have a good, reliable lender,” he advises. “Get the loan that fits you, and a lender who will perform and produce. Know the interest rate, and avoid any bait-and-switch at the last minute. Tailor your loan for your goals.” He says to decide on a fixed or variable rate on your own, and be sensitive to the fees, or “points,” you have to pay out. Each point equals 1 percent of a loan.
• When interest rates remain favorable, that’s a sign it’s a good time to buy.
• Location is important, but the market right now “is about price, price, price. It’s a buyer’s market.”
• Location matters, in particular for families with children. The public schools matter, the streetscape matters (do you really want to be facing a street with lots of speeding cars?), and whether you buy
a home with a pool matters, due to the dangers a pool can present.
• With gasoline prices touching nearly $4 a gallon, commuting has become a huge economic issue. If you buy far from your workplace, you need to calculate the real dollars that will add to your living expenses each month. Is public transportation an option? Many new developments are taking advantage of rail service, particularly in Anaheim, Santa Ana and Irvine.
• When it comes to resale value, not all new communities are equal. Some will rise together like a ship – others will not.
• Pay attention to the size of the home. “It’s important to young couples just starting out and thinking of children to consider a three-bedroom home,” advises Smith. “Of course, what you can afford will dictate this.”
• Homeowners association and Mello-Roos fees (the latter pay for major improvements and services over a period of time) often are part of the purchase. “I think one of the things you need to consider is the (monthly cost) of Mello-Roos,” Smith says. “It varies a lot. Know what the particulars are. Is it something you pay out for 20 years or longer? Find out about it.”
• What about attached homes? “It’s always better to have a detached home, rather than an attached home – noise factor, typically a little better house, nice to have a little space, and typically the resale value is greater.”
• Take a look at the lot size and yard. “That’s a personal preference,” says Smith. “A big yard is not for everybody. Usually, homes with a little bit of a yard sell better than those that really don’t have a yard. Those with yards will cost more, because land costs so much more these days.”
• Take a long walk around the new community, which may just be developing or slightly more mature. Talk to homeowners. “More and more communities are trying to be total communities to themselves,” Smith says. “That’s fine; that’s a wonderful concept. That’s knowing what you’re buying.”
• Consider the merits of buying vs. renting. “A great advantage to buying is you write off the mortgage interest on your taxes, you’re building up equity and putting money into your own pocket each month. If you have a fixed-income type of loan, you don’t have to worry about the landlord coming in and raising your rent.”
• With prices soft, Smith suggests you look for the extra benefits new-home builders are putting in as incentives. OCM
Investing
Is now a good time to buy a home?
The animated video on John Burns’ Web site is a whimsical seven-minute tour through some very tough times.
Burns, who runs Orange County-based John Burns Real Estate Consulting, makes this note before a short clip of a roller coaster, complete with screaming riders: “Housing is a cyclical business. The good times … don’t make the bad times any better.”
Cue the roller coaster, and note that the bumpy ride actually may be smoothing out.
Kristine Thalman, CEO of the Building Industry Association of Orange County, has seen the numbers of new-home sales rise in the first quarter of the year.
She attributes a modest Orange County uptick to several factors. A key is that “the median price of an Orange County home … is down to $500,000; that’s getting into the affordable range for a lot of people.”
One of the challenges in the local market, according to Burns, is its recession. “We’re not putting any upward pressure on housing demand at all,” he says. On the other end, he says, “we’re lucky that mortgage rates haven’t risen.”
What the lower median price allows, then, is the opportunity.
“If a homebuyer is looking to live in the home as their primary residence, and they plan on being there a minimum of five years, I think this could be a good time to buy,” says Marc Berger, principal in charge of homebuilding practice and land development for XRoads Solutions Group LLC, with offices in Santa Ana.
New-home sales in Orange County totaled 366 for January and February, the BIA’s Thalman reports, and word from builders such as Brookfield, John Laing Homes, Fieldstone, KB Home and Centex Homes is that sales continue on an upward track.
“The supply of inventory is continuing to erode,” says Adrian Foley, president of Brookfield Homes Southland Group, as builders have slowed construction. “And my sense is that the consumer is realizing that a combination of things is occurring, whether a reduction of availability of homes, or a coinciding situation with interest rates that continue to be favorable, with the outlook in the short run that may not continue.
“I wouldn’t necessarily call it a return to the market, but it is evident that all of our inventories are being depleted right now, and we are not replacing those at anywhere near the pace that we were. It will get us back to more of an equilibrium.”
Burns adds: “Most builders will stop construction rather than drop prices further.”
If there is an overarching key to revival, it may be the sales tag.
“They’ve reduced their prices, No. 1,” Thalman says of the warming new-home market. “No. 2, they still have some incentives.” However, consumers may be sensing that price reductions have reached bottom. Also, “you’re not going to see (incentives such as) ‘we’ll buy a Mercedes-Benz or pay your homeowner fees for 6 months,’” Thalman reports. “Those are gone.”
As Foley points out: “The incentives have to make sense,” and he means for both the consumer and the builder.
“In every market,” says XRoads’ Berger, “there are opportunities now that will eventually be seen as good buys when we look back on them.”
One market anomaly is some new homes cost less than some resales in the same market. Traditionally, people selling their own homes are the last to reduce prices.
“I think this is the best time,” Thalman says. “You’re getting the best of the new homes and all of the upgraded finishes that you wouldn’t have had a year or one and a half years ago.”
For those looking at distressed properties, Berger counsels buyers to go in a specific direction: “Generally, it’s where you want to live and the reasons you want to live there. Rather than look for the deal, look at the geography, the product, and then look for the deal.”
As Thalman notes, investors who drove up prices by flipping homes are mostly gone, and those who are touring model homes are more the kind who plan for their biggest investment.
In that sense, the new-home market may be back to where it needs to be – normal. OCM
Incentives to buy
Want granite or upgraded appliances? Raise your hand. Want a Mercedes thrown in? You’re asking for too much.
Incentive-laden offers are part of the new-home buying process these days in Orange County, though it is important to know what is on the table, so you don’t get too little – or ask for too much.
“What the (remaining) inventory homes provide is the great opportunity for the really highly amenitized home,” says Matt Sauls, regional marketing director for Pardee Homes, Orange County and Inland Empire divisions. “Now, on a go-forward basis in the Inland Empire market and even in Orange County, we are going back to, ‘These are your standards, which are very nice, but we are not going to start building until we have a certain amount of that phase sold.’”
The $150,000 upgrade, which was built in as the market slowed last year, has gone away, Sauls says.
“What we tell people is buy someplace where you really want to live,” Sauls says.
With that in mind, several homebuilders have incentives to move their remaining homes. A sampling:
• Pardee Homes in Ladera Ranch has only two homes remaining in Encantada within the Covenant Hills community. One of the homes has been upgraded with stone flooring downstairs; the kitchen has high-end cabinets and stainless steel appliances. The other home has a butler’s pantry, two refrigerators and two dishwashers. The home has a separate studio with its own fireplace.
•Standard Pacific Homes is offering diverse opportunities at its three products at Talega in San Clemente – Stella Mare, Carillon and Alta. All three have upgrades in some of their models, and Stella Mare and Carillon buyers can benefit from a $40,000 design-studio allowance at some sites. Plus, Standard Pacific Mortgage has a no-lender-fee program for its homes sold through June 30.
• William Lyon Homes, which is selling in Orange County and the Inland Empire, is offering 3 percent down, with down payment assistance in some of its neighborhoods. Some of its properties have reduced their prices, such as Plan Three at Cambridge Lane in the Columbus Square neighborhood in Tustin and at San Carlos at Portola Springs in Irvine.
• Brookfield Homes, which has new homes at Portola Springs in Irvine and Colony Park in Anaheim, is offering some help to customize a consumer’s home during the course of construction. Financing help is also available. And, at Colony Park, the city is offering an assistance program for buyers who qualify under a moderate-income plan.
• Recently, D.R. Horton held an UnAuction Sale, which in Southern California, produced more than 200 home sales over a weekend in March. Homes were sold on a first-come, first-serve basis to pre-qualified buyers at what the homebuilder described as “auction-like prices.” OCM
Workforce living
Keep the young people in town.
Lucy Dunn has made it a part of her professional life to make certain Orange County doesn’t run the emerging professionals and leaders of tomorrow out of town.
The high cost of housing has created a net exodus of county residents ages 25 to 44, according to the Orange County Business Council. Dunn is president and CEO.
Here are her suggestions:
“Cities ought to approve housing; homeowners should feel confident with their solid investment; and homeowners and prospective buyers should buy houses to live in them.”
The ratio of jobs to housing is out of balance, leaving too few homes for one of the nation’s most robust job markets. From 1991-2005, Orange County created nearly 350,000 new jobs, but only 158,000 new homes. Also, Dunn understands that people who buy homes for quick, flip-around investments only create higher prices – and few winners.
“It is a high-cost place to live, and housing is a major factor to being an expensive place to live,” she says. “(Building) housing in every city that likes a robust job market is still an appropriate strategy.”
Dunn says the future job market in Orange County will continue to be “the economic engine for the entire Southland.” With those new positions, housing will be needed to bring workers here, and to keep them here.
The council’s Workforce Housing Scorecard, released last year, suggests more vertical building (land costs are expensive), infill projects that create homes on already developed land, and “high-density residential complexes.”
Currently, the scorecard shows that housing will not keep up with job growth through 2030, which will keep home prices too high for many. That puts at risk the loss of young residents; more commute time for those driving into O.C.; difficulty for employers to attract young workers here; and pressure on the rental market, as apartments will be the only option for many.
“The exclusivity of Orange County’s home prices will continue to factor into work-force planning, and will have a broad and deep impact on our society,” the scorecard predicts. OCM
Mind your Ps and home
John Burns of John Burns Real Estate Consulting has created what he calls “The 6 Ps of Good Builder Research.” OC METRO Business Magazine has added its own comments in parentheses:
• People: Target the right people (and the right homebuilder).
• Product: Design the right product (buy the right home for you).
• Payment/price: Create great value (understand the meaning of a soft market).
• Positioning: Position yourself away from the competition (buy something unique).
• Promotion: Spend wisely.
• Person: Hire the right people for sales (often, the salesperson at a model home tells you volumes about the homebuilder). OCM
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Nathan, 30, and Michelle, 24, rented an apartment for six months before buying a new two-bedroom, two-bath detached condominium in the Woodbury community of Irvine in late 2006. “I could have waited another six months,” Nathan recalls, “but then I would have been in an apartment. It’s just another delay.” Instead, the couple was in the right place to expand their event-planning business, Mint Julep Social Events, and adopt a bustling social life that they found lacking in the Inland Empire. “It’s the only place I’ve lived where I’ve made that many friends so quickly,” he says. The Buckleys are among a cadre of homebuyers who have bought in a tough market, and made business and lifestyle decisions that made sense to them. And, most importantly, they represent a changing dynamic in the market – people who are not investors. “I didn’t buy it to flip it; I bought it to live in it,” Nathan says. Orange County’s population of 3.1 million is affected by housing more than any other economic indicator. The mortgage industry, now decimated, had a huge imprint here. But homebuilders have a huge stake. And they remain, building homes, and innovating, and listening to the consumer. Support industries, such as construction, architecture, planning and land development, derive their livelihood based on whether you are a homebuyer or a seller, a move-up buyer or an anxious first-timer sinking your life into the biggest investment you’ll ever make. And, as everyone knows, the news has not been good. Orange County, like the rest of the nation, is having a fitful time. DataQuick, which tracks new and resale homes and attached properties statewide, reported the slowest March since it began keeping score in 1988 (the April numbers are being released about now). While statewide sales were up nearly 20 percent from February, they were down more than 38 percent from March 2007. In Orange County, 1,663 homes sold in March, nearly one-half the number from a year ago. That said, the market is warming, as there is rationale for being in the market. For example, according to DataQuick, the median price for an Orange County home is $506,000, down nearly 20 percent from a year ago, when $629,000 really took your breath away. Qualifying for a mortgage has become much harder, but that is making qualifying more of a science than the Wild West transactions of subprime and no-stated income needed. Translation: If you can qualify, you have a reduced chance of joining the foreclosure crowd, many of whom moved into homes with no money down and no way to pay escalating monthly payments. The Buckleys are among those new homeowners who have carefully charted their lives. Their business, mostly run out of a home office downstairs, has expanded into Beverly Hills. And, as Nathan notes, it may only be children – an expanding family – that will get them to budge. “We may have to look at something bigger in six years.” For those in the market now, homebuilders are being more generous with incentives and amenities. The mantra that began circulating in the early to mid-1990s, the last time the market went south, is being heard again: Now may be a great time to buy. If so, there are several thoughts to consider, from location to commute, from size of home to the length of expected stay. OC METRO Business Magazine’s Cover Story is a primer for those who are in the market, or considering a move this spring, summer or fall. Where to buy The foreclosure wave that has hit Orange County, along with $4 per-gallon gas prices, makes choosing where you want to live a particularly multi-dimensional event, says a longtime housing expert. With foreclosures and mortgage defaults playing a role into the first quarter of next year, being aware of the neighborhood you want to call home is important, advises Walter Hahn, an Irvine-based real estate consultant. “The first thing I would advise is the same thing I’ve said for 40 years: Buy a home in decent condition, in a stable neighborhood, one that is not going downhill,” says Hahn. “Today, really factor in what is not going downhill because of foreclosures.” Empty, abandoned houses tend to blight neighborhoods, he says – there are and will be many of them. He projects 8,000 foreclosed homes in Orange County this year, 12,000 in 2009, and 10,000 in 2010. “It’s a huge leap everywhere that started the second half of last year.” Cities hit particularly hard with foreclosures are Santa Ana, Anaheim, Buena Park and Garden Grove, he says. And there are limited pockets in South County. Cities and areas much more immune to the trend include coastal areas, Irvine, Rancho Santa Margarita, Anaheim Hills, Yorba Linda and Brea, he says. “If you are looking for a real low-priced home, $400,000 or so, you pretty much have to look in the zip codes where there are foreclosures,” Hahn says. “If that’s all you can afford, that’s where you have to go.” While he believes the selling prices of existing homes “have a ways to go down,” it’s not so with new homes. “They appear to have bottomed out. New-home prices are at, or very close, to the bottom now.” Within new communities, homebuyers ought to rank the school district if children are part of the family; buy a home the farthest from a busy street or freeway; and look for a floorplan and lot size you like, Hahn advises. Once location and price have been ironed out in the homebuying search, Hahn says to carefully examine the real cost of the commute: “This is factoring more and more into people’s decision about where to live. Time has always been a factor, and now, cost has increasingly become a factor.” Homebuilders putting up condos and townhomes near job centers may find their timing perfect, Hahn says. This is a trend that may have growing appeal for both lifestyle and cutting transportation costs. There also is a boomlet in live-work homes, with home-based businesses a growing option for workers. In Anaheim, for example, Harbor Lofts, along Harbor Boulevard and Center Street Promenade, is a group of two-story townhomes by Lee Homes and CIM Group. “Whether retail, professional services or artist’s studio, these live-work townhomes are perfect for a variety of businesses,” says Marilyn Costner, a sales representative. Demographics While high-rise living in Orange County is still very much in flux, the aging population may be drawn to areas along the Jamboree Road corridor in Irvine and the planned Platinum Triangle in Anaheim. The former is where high-rises are now up or going up, and in the latter, as many as 35 towers may be built over the course of the next several years. An aging workforce could change how we build homes, and that might mean denser, smaller and higher. Orange County’s median age is 35, but that is quickly skewing older, according to the Orange County Community Indicators, a document released each year that defines who we are. The report “shows how the county is changing, and how we compare with peer regions in terms of our economy, education, health and well-being, safety, environment, and civic life.” Young adults, ages 25 to 34, are declining, as many in that age group seek other places to live where housing is less expensive, the report indicates. The population of future homeowners, those 15 to 24, is growing modestly. This is the age group one can assume will be populating more urban-centric locations in the future, living alongside an aging population who may also prefer an active lifestyle. How will we live? That brings back the viability of the high-rise in O.C. and urban communities that densely build attached dwellings, such as Central Park West in Irvine. The project has marketed to the foreign-born business people who want to live actively near work and empty-nesters. As OC METRO Business Magazine reported in 2000, Baby Boomers – those 76 million Americans born between 1946 and 1964 – will influence the housing market nationwide as they redefine senior housing. As we wrote then, “For a generation that was born in the shadow of World War II, grew up with Eisenhower and Kennedy, got a whiff of pot, fought in Vietnam, flitted with communes and suffered through the music of the ’70s, beware anyone who tries to build a compartmentalized village. Levittown won’t do.” Now, with the oldest boomers turning 62, these homeowners will affect building for years to come, from mega-projects such as Rancho Mission Viejo’s Ranch Plan and Lennar’s project (the Great Park Neighborhoods) at the former El Toro Marine base, to smaller communities. And that may already be taking place; according to the Community Indicators, some 51 percent of the county’s 1.025 million households are single-family detached, but those types of dwellings – primarily known as suburban enclaves for families – are dwindling. What is built in the next seven years, up to 2015, will greatly define future housing in Orange County, as the report notes that those 32,500 newly built homes will represent 42 percent of all new county housing built by 2035. Employment, with about 1.6 million people on an O.C. payroll, is expected to grow faster than the county’s ability to build homes, putting upward pressure on housing prices and raising the average household size, which is now at 3.1 people. As the report noted, the preferred ratio of jobs to permits is 1-to-5, and in Orange County, it is now 3-to-5, the highest in the state. With Orange County’s 798 square miles, including 42 miles of coastline, there are pockets of dense, urban land use surrounded by permanent open space. Buyer beware As the summer crowds begin to turn an ashen Orange County home market into something a bit more robust, make certain you have the ammunition you need to make the right decision. It’s not only a question of which home you will buy, but how much, where and why. David Buckingham Smith, a Realtor with Seven Gables Real Estate in Tustin, offers 12 tips and observations. • This may seem like a natural in light of the subprime meltdown, but Smith is continually worried that the homebuyer isn’t paying close enough attention to the most important detail of the sale, which is the mortgage. “Make sure you have a good, reliable lender,” he advises. “Get the loan that fits you, and a lender who will perform and produce. Know the interest rate, and avoid any bait-and-switch at the last minute. Tailor your loan for your goals.” He says to decide on a fixed or variable rate on your own, and be sensitive to the fees, or “points,” you have to pay out. Each point equals 1 percent of a loan. • When interest rates remain favorable, that’s a sign it’s a good time to buy. • Location is important, but the market right now “is about price, price, price. It’s a buyer’s market.” • Location matters, in particular for families with children. The public schools matter, the streetscape matters (do you really want to be facing a street with lots of speeding cars?), and whether you buy a home with a pool matters, due to the dangers a pool can present. • With gasoline prices touching nearly $4 a gallon, commuting has become a huge economic issue. If you buy far from your workplace, you need to calculate the real dollars that will add to your living expenses each month. Is public transportation an option? Many new developments are taking advantage of rail service, particularly in Anaheim, Santa Ana and Irvine. • When it comes to resale value, not all new communities are equal. Some will rise together like a ship – others will not. • Pay attention to the size of the home. “It’s important to young couples just starting out and thinking of children to consider a three-bedroom home,” advises Smith. “Of course, what you can afford will dictate this.” • Homeowners association and Mello-Roos fees (the latter pay for major improvements and services over a period of time) often are part of the purchase. “I think one of the things you need to consider is the (monthly cost) of Mello-Roos,” Smith says. “It varies a lot. Know what the particulars are. Is it something you pay out for 20 years or longer? Find out about it.” • What about attached homes? “It’s always better to have a detached home, rather than an attached home – noise factor, typically a little better house, nice to have a little space, and typically the resale value is greater.” • Take a look at the lot size and yard. “That’s a personal preference,” says Smith. “A big yard is not for everybody. Usually, homes with a little bit of a yard sell better than those that really don’t have a yard. Those with yards will cost more, because land costs so much more these days.” • Take a long walk around the new community, which may just be developing or slightly more mature. Talk to homeowners. “More and more communities are trying to be total communities to themselves,” Smith says. “That’s fine; that’s a wonderful concept. That’s knowing what you’re buying.” • Consider the merits of buying vs. renting. “A great advantage to buying is you write off the mortgage interest on your taxes, you’re building up equity and putting money into your own pocket each month. If you have a fixed-income type of loan, you don’t have to worry about the landlord coming in and raising your rent.” • With prices soft, Smith suggests you look for the extra benefits new-home builders are putting in as incentives. OCM Investing Is now a good time to buy a home? The animated video on John Burns’ Web site is a whimsical seven-minute tour through some very tough times. Burns, who runs Orange County-based John Burns Real Estate Consulting, makes this note before a short clip of a roller coaster, complete with screaming riders: “Housing is a cyclical business. The good times … don’t make the bad times any better.” Cue the roller coaster, and note that the bumpy ride actually may be smoothing out. Kristine Thalman, CEO of the Building Industry Association of Orange County, has seen the numbers of new-home sales rise in the first quarter of the year. She attributes a modest Orange County uptick to several factors. A key is that “the median price of an Orange County home … is down to $500,000; that’s getting into the affordable range for a lot of people.” One of the challenges in the local market, according to Burns, is its recession. “We’re not putting any upward pressure on housing demand at all,” he says. On the other end, he says, “we’re lucky that mortgage rates haven’t risen.” What the lower median price allows, then, is the opportunity. “If a homebuyer is looking to live in the home as their primary residence, and they plan on being there a minimum of five years, I think this could be a good time to buy,” says Marc Berger, principal in charge of homebuilding practice and land development for XRoads Solutions Group LLC, with offices in Santa Ana. New-home sales in Orange County totaled 366 for January and February, the BIA’s Thalman reports, and word from builders such as Brookfield, John Laing Homes, Fieldstone, KB Home and Centex Homes is that sales continue on an upward track. “The supply of inventory is continuing to erode,” says Adrian Foley, president of Brookfield Homes Southland Group, as builders have slowed construction. “And my sense is that the consumer is realizing that a combination of things is occurring, whether a reduction of availability of homes, or a coinciding situation with interest rates that continue to be favorable, with the outlook in the short run that may not continue. “I wouldn’t necessarily call it a return to the market, but it is evident that all of our inventories are being depleted right now, and we are not replacing those at anywhere near the pace that we were. It will get us back to more of an equilibrium.” Burns adds: “Most builders will stop construction rather than drop prices further.” If there is an overarching key to revival, it may be the sales tag. “They’ve reduced their prices, No. 1,” Thalman says of the warming new-home market. “No. 2, they still have some incentives.” However, consumers may be sensing that price reductions have reached bottom. Also, “you’re not going to see (incentives such as) ‘we’ll buy a Mercedes-Benz or pay your homeowner fees for 6 months,’” Thalman reports. “Those are gone.” As Foley points out: “The incentives have to make sense,” and he means for both the consumer and the builder. “In every market,” says XRoads’ Berger, “there are opportunities now that will eventually be seen as good buys when we look back on them.” One market anomaly is some new homes cost less than some resales in the same market. Traditionally, people selling their own homes are the last to reduce prices. “I think this is the best time,” Thalman says. “You’re getting the best of the new homes and all of the upgraded finishes that you wouldn’t have had a year or one and a half years ago.” For those looking at distressed properties, Berger counsels buyers to go in a specific direction: “Generally, it’s where you want to live and the reasons you want to live there. Rather than look for the deal, look at the geography, the product, and then look for the deal.” As Thalman notes, investors who drove up prices by flipping homes are mostly gone, and those who are touring model homes are more the kind who plan for their biggest investment. In that sense, the new-home market may be back to where it needs to be – normal. OCM Incentives to buy Want granite or upgraded appliances? Raise your hand. Want a Mercedes thrown in? You’re asking for too much. Incentive-laden offers are part of the new-home buying process these days in Orange County, though it is important to know what is on the table, so you don’t get too little – or ask for too much. “What the (remaining) inventory homes provide is the great opportunity for the really highly amenitized home,” says Matt Sauls, regional marketing director for Pardee Homes, Orange County and Inland Empire divisions. “Now, on a go-forward basis in the Inland Empire market and even in Orange County, we are going back to, ‘These are your standards, which are very nice, but we are not going to start building until we have a certain amount of that phase sold.’” The $150,000 upgrade, which was built in as the market slowed last year, has gone away, Sauls says. “What we tell people is buy someplace where you really want to live,” Sauls says. With that in mind, several homebuilders have incentives to move their remaining homes. A sampling: • Pardee Homes in Ladera Ranch has only two homes remaining in Encantada within the Covenant Hills community. One of the homes has been upgraded with stone flooring downstairs; the kitchen has high-end cabinets and stainless steel appliances. The other home has a butler’s pantry, two refrigerators and two dishwashers. The home has a separate studio with its own fireplace. •Standard Pacific Homes is offering diverse opportunities at its three products at Talega in San Clemente – Stella Mare, Carillon and Alta. All three have upgrades in some of their models, and Stella Mare and Carillon buyers can benefit from a $40,000 design-studio allowance at some sites. Plus, Standard Pacific Mortgage has a no-lender-fee program for its homes sold through June 30. • William Lyon Homes, which is selling in Orange County and the Inland Empire, is offering 3 percent down, with down payment assistance in some of its neighborhoods. Some of its properties have reduced their prices, such as Plan Three at Cambridge Lane in the Columbus Square neighborhood in Tustin and at San Carlos at Portola Springs in Irvine. • Brookfield Homes, which has new homes at Portola Springs in Irvine and Colony Park in Anaheim, is offering some help to customize a consumer’s home during the course of construction. Financing help is also available. And, at Colony Park, the city is offering an assistance program for buyers who qualify under a moderate-income plan. • Recently, D.R. Horton held an UnAuction Sale, which in Southern California, produced more than 200 home sales over a weekend in March. Homes were sold on a first-come, first-serve basis to pre-qualified buyers at what the homebuilder described as “auction-like prices.” OCM Workforce living Keep the young people in town. Lucy Dunn has made it a part of her professional life to make certain Orange County doesn’t run the emerging professionals and leaders of tomorrow out of town. The high cost of housing has created a net exodus of county residents ages 25 to 44, according to the Orange County Business Council. Dunn is president and CEO. Here are her suggestions: “Cities ought to approve housing; homeowners should feel confident with their solid investment; and homeowners and prospective buyers should buy houses to live in them.” The ratio of jobs to housing is out of balance, leaving too few homes for one of the nation’s most robust job markets. From 1991-2005, Orange County created nearly 350,000 new jobs, but only 158,000 new homes. Also, Dunn understands that people who buy homes for quick, flip-around investments only create higher prices – and few winners. “It is a high-cost place to live, and housing is a major factor to being an expensive place to live,” she says. “(Building) housing in every city that likes a robust job market is still an appropriate strategy.” Dunn says the future job market in Orange County will continue to be “the economic engine for the entire Southland.” With those new positions, housing will be needed to bring workers here, and to keep them here. The council’s Workforce Housing Scorecard, released last year, suggests more vertical building (land costs are expensive), infill projects that create homes on already developed land, and “high-density residential complexes.” Currently, the scorecard shows that housing will not keep up with job growth through 2030, which will keep home prices too high for many. That puts at risk the loss of young residents; more commute time for those driving into O.C.; difficulty for employers to attract young workers here; and pressure on the rental market, as apartments will be the only option for many. “The exclusivity of Orange County’s home prices will continue to factor into work-force planning, and will have a broad and deep impact on our society,” the scorecard predicts. OCM Mind your Ps and home John Burns of John Burns Real Estate Consulting has created what he calls “The 6 Ps of Good Builder Research.” OC METRO Business Magazine has added its own comments in parentheses: • People: Target the right people (and the right homebuilder). • Product: Design the right product (buy the right home for you). • Payment/price: Create great value (understand the meaning of a soft market). • Positioning: Position yourself away from the competition (buy something unique). • Promotion: Spend wisely. • Person: Hire the right people for sales (often, the salesperson at a model home tells you volumes about the homebuilder). OCM |
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