East Bay's new-home inventory declining

East Bay's new-home inventory declining
Builders on hold, but buyers still find plenty of choices
East Bay Business Times - by Jessica Saunders

The backlog of new homes for sale in the East Bay is slowly declining, despite competition from existing- and foreclosure-home sales, and fewer buyers who can qualify for loans.

That's good news because inventory is a gauge of building-industry health and a key guide to the future supply of new homes.

Although builders have cut prices by as much as 25 percent, a slowdown in building has shrunk inventories more than the lower costs have, said Dean Wehrli, vice president of Sullivan Group Real Estate Advisors in Sacramento.

"Of course, the trick is knowing what is truly going to be introduced onto the market and when," he said.

Builders have a number of ways to reduce supply, among them slowing or stopping construction, converting to a different product type, seeking city or county approval for a different use, auctioning off units or, in extreme cases, giving a project back to the bank, said Michael Ghielmetti, president of Signature Properties in Pleasanton.

All that makes housing inventory a moving target for industry analysts like Wehrli.

Inventory is also an ongoing expense for most builders, who can pay hundreds of dollars a day per unit in interest on construction loans. "With prices doing what they have done, for builders to have cash tied up in inventory like that is not a real healthy thing," said Don Hofer, vice president of community development for Shea Homes in Livermore.

Even builders who don't borrow money dislike unsold units on the books, said Chris Truebridge, president of Shapell Homes, which is developing Gale Ranch in San Ramon. "It ties up half a million dollars of capital in that house, so I don't like it. I want to get revenue out of it," he said.

Inventory levels vary throughout the East Bay, with eastern Contra Costa County having the highest numbers of unsold new homes, according to Hanley Wood Market Intelligence's March report, the most recent available. There were 519 units of standing inventory - units either completed or within 30 days of completion - in the area, which includes Antioch, Brentwood, Discovery Bay, Pittsburg and Oakley. That amounts to a 6½-month supply based on the current sales rate, according to the report.

There were no units in the East County area listed as "under construction," which means the foundation or vertical construction has started but the home will not be completed within 30 days.

"Until those builders get through that product they aren't going to build anything new," said Stephen Smiley, principal at Meyers Builder Advisors in San Ramon, a real-estate consulting firm. He noted that the current sales rate of one to two units a month per subdivision is historically low, which drives up the months-of-supply figure. A 10-year average rate would be four sales per subdivision a month, Smiley said.

New-home builders in eastern Contra Costa County compete for buyers with the foreclosure-saturated resale market, Smiley said. There were more than 3,400 properties with foreclosure filings in Antioch, Brentwood, Discovery Bay, Pittsburg and Oakley in April, according to ForeclosureRadar.com.

But Hofer, whose company, Shea Homes, has four open communities in east Contra Costa, said sales are beginning to stabilize in the area. Shea is starting construction on new phases there, he said.

Standing inventory was up 971 percent in Alameda County and 55 percent in Contra Costa County in March compared to a year ago. Solano County had no standing inventory in March 2007 but 62 units in March, Hanley Wood said. Under-construction units were also much higher in Alameda and Contra Costa, but were down somewhat in Solano County.

Hanley Wood also tracks future construction, or units in active subdivisions that are planned but not under construction yet. During downturns builders usually "mothball" this inventory category and wait out the market. There were approximately 16,000 future-construction housing units throughout the East Bay in March.With all those units to move, the law of supply and demand kicks in, lowering prices. "In some markets we have seen houses priced 25 percent below peak, maybe more at this point," Smiley said. "That doesn't necessarily mean they will sell, either."

Shapell Homes is willing to negotiate on remaining units in its older subdivisions to close them out, Truebridge said. "Shoppers right now are looking for the absolute bottom price," he said.

Shea Homes has initiated "net pricing," effectively a price reduction equivalent to the value of previously offered incentives, Hofer said. "We think it's helping drive more buyers to the marketplace," he said.

Prices, however, are only one of the hurdles for buyers. Credit is another. Mortgage lenders burned by defaults and foreclosures now want down payments and higher credit scores than were required from 2002 to 2005, Wehrli said.

"Even if you get to the right price, the buyer pool is smaller than it was two, three, four years ago, because of the lack of the kind of mortgage vehicles they had two, three, four years ago," he said.

Those who do qualify have been waiting for the market to bottom out, afraid to overpay if prices could fall further. Home builders are trying to restore confidence with price guarantees, such as Signature's Live Secure program, which was rolled out last month.

"The single biggest question everyone out there is asking our folks is, 'Are we at the bottom?' That's the No. 1 phrase people use," Ghielmetti said. "Consumer and investor psychology is at play more than anything right now."

jsaunders@bizjournals.com | 925-598-1427