The Reality of Pent Up Demand

What if you threw a party and everyone shows up. On Saturday (July 18^th) I was shocked. To be honest it was more than a shock, it was a total smack upside the head. For those who have doubted the reality of the marketplace and the demands that high prices and low production have on housing, only had to be with me at the Trilogy Vineyards community in Brentwood, California. What happened Saturday was more than just an open house, it was a full-fledged storming of the castle and taking siege.

Background

Trilogy at the Vineyards (GO HERE) is a resort type active adult master planned development about forty miles east of San Francisco. It sits near the Sacramento River (five miles north), within the eastern hills below Mt. Diablo, and is about an hour and a half from Sacramento, and an hour from Stockton. My land planning and landscape architecture firm has been working with Shea Homes (parent of the Trilogy brand) for more than ten years on the project. The community’s market is about fifteen million people that stretches from Santa Clara County to Sacramento County (and in reality, much farther). The community has a first class clubhouse and recreation facility, great tracts of vineyards that roll right up to the back doors of the homes as well as extensive olive groves – one could believe they are in Tuscany.

The Opening

For the last three months Trilogy Vineyards (Go HERE) has been marketing their new models (at least five new plans designed around the active adult market)—single story with a master down, high-end fixtures and appliances, well decorated, and considering the Bay Area market – very reasonable ($650,000 to $900,000). Extensive on-air radio time was purchased and even Masterpiece Theater on Sunday evenings was not missed.

I don’t have the final numbers but by the time I arrived at 12:15 Saturday more than 1500 people had arrived (or more) and my guess is that more than 4,000 prospective buyers or interested parties walked through the complex that afternoon. It was also an event that showed off Brentwood, the medical clinics and emergency services, restaurants, local cultural, to dispel the rumors about living out in the far reaches of the Bay Area. A first class job all around.

The active adult (over 55 but really over 65) is a rich market both literally and figuratively. We/they are all in the same boat: How do I get the equity out of my home and still remain in the region and not be required to live in some dumpy little 1,200 s.f. apartment with a bunch of whiney thirty-somethings living next door. We/they deserve better and this is the type of project that may appeal to us/them. The turnout seemed to prove this. While the conversion rate may be low, the exposure is unbelievable.

The active adult residential market that is in dire need of expansion and growth. The impact of the these types of projects roll through the residential marketplace, these projects usually free up housing stock that is closer to jobs and urban centers. This market—the baby boomer—has longs legs and will be growing for the next ten to fifteen years. It’s time that more builders get on board.

Stay Tuned . . . . . . . . . . .

Is Housing Too Expensive?

Roller-Coaster Housing Prices

I read a post the other day that said the reason for the flat rate of housing sales is that they are too expensive. According to the article by Frank Anton, only 1 in 6 homes sold is a new home. Currently the percentage is even lower. One of the reasons is the national average has new homes costing 45% more than an existing home. I’m shocked that it took this long to figure out what has been the norm for more than fifty years—new homes almost always cost more than existing homes.

It is this relationship between the new home and the existing home that has provided the base line for affordable housing—the existing older home is the affordable home market. The twisted belief that we can build new affordable housing is the mantra pushed by agencies, charities, and cities. And the only way it happens is by subsidies, fees tacked on new housing, and grants. In other words new affordable housing exists because someone other than the homebuyer is contributing to the bottom line cost of the house. Which brings me back to home prices.

Outside of those few who believe that all homebuilders are carpetbaggers, speculators, and opportunists, almost every builder I know won’t build unless he has a confirmed market. There is little if any speculative building today, this is a lesson they learned in 2008 when it all when to hell in a lender’s basket. To believe that builders just throw out product like they were chumming for tuna is just plain silly—the forces of the marketplace would kill them.

At any time in any market housing will be too expensive—until it's not. What controls housing costs are five things: land cost, entitlements, materials, labor, and profit. Working backwards the builder makes choices through these five factors to set his price. He narrows his profit, he finds cheaper or non-union labor, he buys materials in bulk, he begs for fee reductions (building the park may be cheaper than paying the park fees), and lastly maybe he can renegotiate the land cost. It is a complex dance played to the tune of the band—the marketplace—that has its own balancing act of interest rates, debt, and income.

The difficulty today, especially in dense urban markets, is the newest player in the game—the non-profit affordable home builder (the non-profit thing is a ruse, they make a lot of money, it’s just called something different). They compete directly and unfairly with the for-profit builder at the first-time-buyer market. Why would a builder go through all the sturm and drang of the entitlement process to compete at the lowest cost/profit level when, with government assistance, he can and will be undercut? They won’t, they will just build to a different price point.

So, the real reason for the rising cost of housing is that we are not building enough housing—period. The only way that housing costs can go down is to noticeably modify one of the five factors. I don’t see this happening in the near future. Land costs are dramatically rising in urban areas, my experience recently is that cities are not interested in reducing their fees (some are raising or expanding their fees), materials costs are holding steady but this is a result of more supply than demand, labor is flat (but the push on the minimum wage may have an effect), and profit is what it is, except when there is competition which can noticeably affect the price.

It’s my opinion the biggest problem right now is the first time homebuyer market. They are unsure about the future and will bide their time. If they can settle into a good apartment, get their student debt managed, and maybe even find a willing partner to share the burden, the market will change. But right now I think they are marking their time—which is not good for the merchant homebuilder.

Stay Tuned . . . . . . . .