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If You Build Them They Will Buy, Buy And Buy
Coming off a rocking 2002, the only thing slowing new home builders is a shortage of lots to develop

By Maria L. Kirkpatrick

Home builders report 2002 as one of their best years as new homes were snatched up by buyers trying to get ownership while interest rates afforded mortgage payments as low and lower than some rent throughout the county.

Horton-Continental/Western Pacific finished the year as the sales leader in San Diego County, with 1,687 opened escrows in 2002, reports MarketPoint Realty Advisors. That’s twice the number of any other developer. Greg Hastings, division president of Horton-Continental, says his part of the company saw sales of more than 1,100 homes in San Diego and Riverside County.

“We are extremely pleased with our division’s 2002 performance,” Hastings says. He credits the success to “the strength of the markets we’re in, our exceptional team and our strong focus on customer satisfaction.” It also helps that D.R. Horton is a company of Continental Homes and Western Pacific Housing.

Horton was not alone in having an outstanding year.

“This was our best year ever. Hands down,” says Mark McMillin, president of McMillin Cos. His company finished 2002 ranking No. 9 with 326 opened escrows. McMillin reports it closed escrow on 1,130 new homes throughout San Diego and Riverside counties.

Pardee Construction ranked No. 5 with 454 opened escrows. The firm typically ranks in the Top 10. “We are very optimistic on 2003,” says Beth Fischer, vice president of community development for Pardee. “We are right on target with the numbers this month.”

The soaring sales numbers seem to be limited only by the number of homes that could be built. Indeed, projects frequently sold out before the homes were even complete. “Sales were very brisk and the appreciation very good,” says Jennifer Bonasia, director of sales for Greystone Homes in San Diego, of the year that placed Lennar/Greystone at No. 10 with 316 in-escrow homes. “We can only sell as much as we can build,” Bonasia says. “I expect we could sell all we could release.”

Downtown housing sales have seen the same success. Dennis Serraglio, sales manager for Bosa Development, says 2002 was an excellent year. “We sold everything we had to offer and actually were out of product for about three months.” Bosa ranked No. 13 with 274 open escrows in 2002. Serraglio attributes his company’s success to the rejuvenation of Downtown. “It’s a mad scramble to get a place Downtown,” he says. “When we open the doors to the second tower (at the Grande Santa Fe Place) we won’t be able to hold people back.”

Bosa is not alone. Serraglio says everyone building Downtown is enjoying the same success. Nobody knows what comes around the corner, but based on our response things are just getting better.

Today’s Success The Story Of Tomorrow

Developers say the sales successes of 2002 are carrying over to 2003 as San Diego still has a shortage of housing. But while builders still sell everything they construct, analyst Russ Valone of MarketPoint Realty Advisors says 2003 won’t see as many new home sales. The reason is simple: A shortage of buildable new home lots. That shortfall helps fuel demand and also drives up home prices.

Some builders are better positioned than others.

Acknowledging San Diego is running out of “traditional sprawl space, McMillin says his company still controls enough land to do about 1,000 new homes for the next five years. He expects to see 232 individual units close in 2003 and even more in 2004. Then, he says, new developments will bounce off the mountains and ricochet back through old neighborhoods. I don t think all the redevelopment in the county has to look at Downtown. Areas McMillin says could use redevelopment include La Mesa, Lemon Grove and Clairemont.

Peter Reeb of Reeb Development Consulting predicts home sales will decline about 10 percent in 2003. He says the main reason for the success of 2002 was low interest rates. The heat of last year was driven by interest rates and the buying power low rates bring, he says. I don't see rates going much lower than they are. Unless they go lower, it won t bring new people to the market. If they start going up, some people may jump so they won't be left out, but most people will be priced out.

The other reason Reeb cites is this year s slower job growth in San Diego. Fewer new projects this year also will keep a cap on new home sales, Reeb says. In San Diego, always look at supply and demand. Prior to the 1990s, housing was demand driven. Now it s supply driven; builders can t meet the demand.

Shortage Drives Prices Affordable is a relative term these days as housing prices continue to escalate. In spite of rising cost, Fischer says Pardee expects to see 2003 similar to 2002. Sale prices continue to be forced up by the market deficit. Pardee expects to have 11 projects available in San Diego in 2003 with the number of home sales close to the same amount as last year.

Again, it is market conditions.

Prices are going to continue to rise because the market has been undersupplied for so long, Reeb says. New home prices will increase an average of 10 percent to 15 percent in 2003.

Some of the increase is fueled by the profit existing owners make when they sell. It would be good if prices stabilized and then went up in lesser amounts, says Serraglio. But it s all relative, people are selling their homes for higher prices and can afford to buy at higher prices.

In response to higher prices, some builders will get more creative in efforts to provide affordable housing. San Diego has been void of affordable homes, says Greystone s Bonasia. We are trying to fill that void. Lennar s 2002 projects included single-family detached homes in the North County. This year the firm will do more building in Central San Diego and work on attached homes that generally are more affordable.

At Horton, Hastings hopes to match 2002 s sales total and also hold the line on pricing. The type of product that we are offering will be changing over this and next year, Hastings says. As far as market trends, you are going to see some more attached housing coming. I hear other builders are getting into attached too. We re all doing the best we can to pursue keeping the average price of houses down. And the best way to do that today is to increase density.

Horton s completed projects last year broke down into about 70 percent detached housing and 30 percent attached. That s going to shift for us, Hastings says. We have a lot of triplex and townhome projects coming. That will help keep our average price point at a level that people in San Diego and south Riverside can afford.

Although there is a whisper about a rise in interest rates, developers don t fear it having much of an impact on their sales. When the interest rate starts to creep up, you get a flurry of sales, says Valone at MarketPoint Realty Advisors. The rate is so low now, we could see some movement up and won t see too much of an impact (on sales). The interest rate doesn t drive as much as we think it does; when it climbs people tend to move toward the market.

Anticipating even more success in 2003, Bonasia projects Greystone will see between 300 and 400 homes close escrow. Although the interest rate and world unrest is on most people s minds, she says they will have little impact on the middle market, homes in the $200,000 to $300,000 price range, because of the limited availability. That market is deep enough to have less effect, she says. It s the high-end market that slows the quickest.

The bottom line on 2003 is that in spite of rising interest rates or war on the horizon, developers predict more of the success brought in with 2002. Serraglio sums it all up with: there are just too many ifs to worry about.

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