Reports of California's Demise are Overblown

This article first appeared in the Reports of California's Demise are Overblown issue of Pro Builder.

After unprecedented levels of price appreciation, the San Diego market has returned to normal market conditions. Three factors have contributed to the softening of the market:

Increasing competition from builders
Increasing competition from condominium converters
Increasing competition from resale listings

While some overpriced situations exist, market demand and supply is largely in balance. The 19,400 jobs created in the last 12 months exceed construction levels by 23 percent, which is a healthy demand/supply level.

Affordability is a major problem in San Diego, with a median resale home price that now exceeds $550,000. The slowly declining resale volume in San Diego supports the notion that entry-level buyers are being priced out of the market.

The market is very competitive for builders. Buyers have choices, and will purchase the homes that offer the best design and best execution. Lot and view premiums are likely to be declining. This is a time for San Diego builders to be fine tuning their operations, but not panicking. The economics for San Diego dictate a "B" housing market, so the currently soft housing market is likely to correct itself in 2006.

Up and Coming Market: Sacramento

Sacramento recently cracked the list of the top 20 housing markets in the country, with 21,110 permits issued in the last year. Our short-term outlook is a "D" because of the high levels of supply and historically poor affordability. However, we are very bullish on Sacramento over the long-term because it has the following:

Jobs — A strong employment base, including Hewlett-Packard, Intel and other operations that are within two hours of Silicon Valley
Affordable Housing — At a $400,000 resale median home price, Sacramento is still affordable by California standards
Accessibility — The recently expanded airport is within minutes of downtown and two of the country's largest freeways (I-5 and I-80) intersect in Sacramento
Land - Thousands of acres of undeveloped agricultural land are within a reasonable commute of the employment centers. Local developers complain about the entitlement woes, but development restrictions are much less severe than in the larger California markets. Flood issues keep much of the raw land from being developed, but we anticipate that levee and other improvements will solve these problems over time.

Sixteen of the top 25 Giant builders in the country have moved into Sacramento in the last few years, making it a competitive market. However, all 16 are likely to do well, at the expense of the small builder.

jburns@realestateconsulting.com

Top 20 Metro Areas

			Employment			Affordability			Permits
		Short-Term Outlook/Grade	1-Year Payroll Employment Growth	1-Year Growth Rate	Unemployment Rate	Median Resale Home Price	Resale Housing Costs as % of Income	Housing Cycle Barometer	12-Month Single-Family Permits	1-Year Single-Family Growth	12-Month Total Permits	Total Permits as % of Peak Permits
1	Atlanta	B	14,800	0.65%	5.2%	$162,872	23.7%	4.5	58,554	-0.5%	73,715	98%
2	Phoenix	B	71,600	4.30%	4.2%	$259,000	42.3%	6.5	59,914	0.9%	63,507	96%
3	Houston	B	30,600	1.34%	5.2%	$143,100	25.7%	4.0	49,000	5.9%	60,029	91%
4	Riverside-SB	C	19,000	1.66%	5.4%	$360,000	61.9%	7.1	43,960	6.5%	50,454	88%
5	Dallas	B	17,400	0.91%	5.0%	$158,400	26.9%	3.1	30,064	-0.5%	36,718	50%
6	Las Vegas	A	62,100	7.62%	4.0%	$300,000	52.2%	5.7	28,859	-13.3%	34,509	84%
7	Chicago	C	28,400	0.75%	5.9%	$259,000	41.0%	6.8	27,823	-2.2%	40,924	96%
8	Tampa	C+	31,600	2.48%	3.5%	$185,000	36.3%	6.2	26,396	18.1%	34,335	91%
9	Orlando	B+	45,500	4.68%	3.6%	$229,900	41.1%	6.5	26,253	-4.1%	34,400	97%
10	Washington D.C.	B+	71,800	3.13%	3.0%	$430,000	47.9%	7.3	23,730	7.4%	31,933	84%
11	Fort Myers	C+	9,200	4.58%	3.3%	$207,310	36.8%	6.9	21,591	67.3%	27,073	100%
12	Minneapolis	C+	21,200	1.22%	5.3%	$247,500	34.3%	6.8	17,961	-14.7%	24,088	85%
13	Charlotte	A	24,000	3.11%	3.8%	$160,250	27.4%	2.5	17,761	1.5%	20,898	92%
14	Jacksonville	B+	13,900	2.38%	4.6%	$179,900	31.2%	6.0	17,577	25.3%	24,668	100%
15	Sacramento	D	16,200	1.90%	4.9%	$400,000	61.4%	8.6	17,084	-9.2%	21,110	89%
16	Denver	B	19,800	1.68%	4.9%	$248,000	36.6%	5.9	16,997	5.0%	20,823	72%
17	Fort Worth	B	9,500	1.20%	4.3%	$113,100	20.3%	4.0	15,868	5.6%	19,440	50%
18	Austin	B	12,900	1.93%	4.8%	$167,600	29.8%	5.1	15,496	-7.6%	19,899	75%
19	San Antonio	B+	9,800	1.28%	4.2%	$134,600	27.5%	2.7	13,777	4.1%	21,807	100%
20	Nashville	B	10,600	1.48%	4.3%	$148,380	26.6%	5.0	13,669	6.2%	17,229	94%
Sources: Bureau of Labor Statistics; Census Bureau through the month ending August 2005; John Burns Real Estate Consulting