Sacramento area home builders struggle with rising demand, lack of ready lots

04/21/2013 12:00 AM

04/22/2013 6:30 AM

Sacramento's giant home-building machine stopped in its tracks when the housing market collapsed seven years ago. Now, with the market improving, it's proving difficult to restart.

Home builders, caught off guard by the suddenness of the upturn, say they're struggling to meet growing demand – primarily because they can't find enough lots to put houses on.

"Everybody's just going as fast as they can, but you can't just flip a switch and expect to be up to full production," said Chris Cady, Central California division president of KB Home, one of the nation's largest builders.

The bottleneck in home building is limiting the supply of new homes and driving up prices. That's good for sellers, but not so much for buyers, a growing number of whom are trying to take advantage of record-low mortgage rates. With resale homes in short supply, they're turning to new homes, only to find those in short supply, too.

The holdups in home building also are delaying construction-related jobs from recovering more quickly. When it's humming, construction is a major economic force in the Sacramento region.

"If this picks up momentum and we start to see an expansion in home building again, you'll feel it," said economist Jeff Michael with the University of the Pacific in Stockton. "That would make a stronger impact on the job market than anything else in Sacramento."

Today, the biggest factor holding back housing construction in the Sacramento region is not a lack of buyers, builders say. It's a scarcity of lots that are ready or nearly ready to build on.

Long-term, Sacramento has no lack of land on which to spread out. Local governments approved tens of thousands of new homes during the boom years, development that eventually will spread north, south, east and west of the capital.

But experts say that – for the moment at least – this abundance is purely on paper.

For one thing, home builders that once owned thousands of lots sold them off during the downturn to satisfy Wall Street and secure tax breaks.

Many of the investors who bought those lots are now reluctant to sell them because they expect that the price of land zoned for housing will continue to rise, ensuring them bigger profits.

Another reason for the land shortage: Construction on essential improvements like roads and utilities nearly ceased after 2006, when the housing market started to fall apart.

"We haven't been doing a lick of site development in the last seven years," said Jim Radler, senior marketing consultant with Land Advisors Organization in Roseville. "There's no finished lot supply."

Builders are competing for the relatively small number of lots available for purchase at what Radler called a "frenzied pace."

So far this year, more than 3,200 lots on nearly 1,800 acres have been sold in the four-county area for a total of $87 million, he said.

A tidy profit

Ethan Conrad, one of the region's biggest owners of office buildings and shopping centers, was among those who sold residential lots to builders this year at a tidy profit.

Conrad normally doesn't invest in residential land. But he bought 1,100 lots from Ryland Homes when the home-building giant exited Sacramento in the downturn. Conrad said he paid about $5 million for the lots in which Ryland had invested $70 million.

He said big publicly traded home builders dumped their lots to get rid of the debt that was weighing down their balance sheets, and also to take advantage of tax write-offs that minimized their losses.

Today, the lots he bought from Ryland are probably worth about $20 million, four times what he paid, Conrad said.

He recently sold about 280 lots in Folsom, Fair Oaks and Rancho Cordova to big home builders including Lennar, KB Home and DR Horton.

"The light switch has come on," Conrad said. "If lots are in a reasonably decent location, (builders are) actively pursuing them."

Industry consultant Greg Paquin, who heads the Gregory Group in Folsom, said not all investors are willing to sell.

"Some investors are waiting and saying, 'My return will be better in a year,' " Paquin said. The result is that "supply is really constricted right now."

New projects – including a major expansion of Folsom south of Highway 50 – will eventually come online, Paquin said, but securing the final approvals and getting land ready for building could take years.

"We won't see equilibrium (between supply and demand) until 2015," he said.

Mike McKeever, executive director of the Sacramento Area Council of Governments and an advocate of measured growth, said he has little reason to doubt builders' complaints about a shortage of lots.

"It's very possible to have an oversupply of long-term capacity and an undersupply of short-term capacity," said McKeever, whose agency oversees regional transportation planning.

McKeever cited figures from Metrostudy, a Washington, D.C.-based real estate information firm, that count about 13,500 buildable lots in Sacramento, Placer, Yolo, El Dorado, Yuba and Sutter counties.

Almost 3,000 of those lots are in Natomas, which is under a de facto building moratorium because of federal concerns over levee safety in the flood basin. Any houses built there would require living areas 20 feet aboveground.

Other areas, such as the huge Plumas Lake development in Yuba County, are deemed undesirable for construction right now because they are so far from the region's job centers.

The number of active projects in the Sacramento region, where homes are being built, has dwindled from about 300 at the peak of the housing boom in 2005 to only about 62 today, according to the North State Building Industry Association.

In many of those projects, new homes are selling quickly. Hot spots include foothill communities like Roseville, Lincoln and El Dorado Hills, along with Elk Grove in southern Sacramento County.

The association recorded 231 new-home sales in March in the Sacramento region – the highest monthly number since 2008 – with buyers taking advantage of historically low rates of about 3.5 percent for 30-year fixed mortgages.

Caution remains

Kevin Carson, president of the New Home Company, said his firm has sold out of homes in projects in Lincoln and Elk Grove and will soon sell out at the Trails in Folsom.

Customer foot traffic is strong, Carson said. Incentives to buyers, such as free upgrades on flooring and appliances, are going away. Prices are coming up. All are signs of a strengthening market, he said.

In West Sacramento, David Ragland said his company, Premier United Communities, has sold almost all of the 20 homes it is building at Stone Harbor, in the city's Southport area.

"We've got one house and two models left," Ragland said. "Demand has just been incredible."

The company bought the lots last year for prices that were above market rate, he said. But rising prices for the homes, which are listed in the low $300,000s, increased profit margins.

He attributes the demand for new homes and the rise in prices to the record low supply of resale homes on the market today.

Cady, at KB Homes, said his company's houses in the region have been selling briskly. For instance, KB has just about sold out of its houses in the Hideaway at Treehouse community in Folsom.

"We're down to our last six," he said.

The growing sense of optimism among builders hasn't completely erased the harsh memory of the downturn – with its mass layoffs and free-falling sales. They remain wary of expanding too fast and hesitant to hire workers they might have to lay off if demand subsides.

"That's where the caution is," Carson said. "If you bring people on and it isn't a sustained market turnaround, then you're going to have to let people go. Given how difficult it was last time, we don't want to go through that again."

Continued growth depends on whether more Bay Area buyers enter the market, which typically happens as housing swings upward, he said. "We haven't seen that yet," Carson said.

Investing money in streets and other infrastructure, needed to create more housing lots, is another "big bet," Cady said. Builders want to be more certain of continued sales before they make major expenditures.

"We're cautiously optimistic, but it's been a long seven or eight years," Cady said. "It was a tough fall. Everyone remembers that. They don't want to put in all their chips and go gangbusters."

Call The Bee's Hudson Sangree, (916) 321-1191. Staff writer Phillip Reese contributed to this report.

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