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Builders Bet Too Heavily On The Upscale Market

A report from the Orange County Register in California. “Southern California builders, stuck with the largest supply of unsold homes in seven years, have slashed construction to the slowest pace since 2016. First-quarter data from MetroStudy shows 3,750 new homes went unsold in the four counties covered by the Southern California News Group — an increase of 688 units in a year or 22% and up 37% vs. the five-year average. It was builders’ largest inventory of unsold units since 2012’s first quarter.”

“Local builders are struggling with numerous selling challenges. According to CoreLogic, builders started 2019 with new home sales down 25% from a year ago. First quarter closed sales totaled 2,988 units.”

“Builders bet too heavily on the upscale market, which has been hurt by a pullback of foreign, mainly Chinese, buyers. The more affordable parts of the market have been slowed by higher mortgage rates.”

“Plus, there’s been a surge of existing homes listed for sale, increasing options for house hunters. The four-county Southern California region had 35,491 listings as of May 2 — 6,373 more than a year earlier, or a 22% increase, according to ReportsOnHousing. Since 2012, listings averaged 30,822 in early May.”

“Los Angeles County: 935 finished unsold homes, up 5% over 12 months and up 19% vs. the five-year average. L.A. has 4,231 units under construction, down 2% in a year and up 20% vs. the five-year average. L.A. new-home sales fell 32% to 615 units.”

“Orange County: 1,108 finished homes for sale up 32% over 12 months and up 85% vs. the five-year average. O.C. has 1,982 units under construction, down 33% in a year and down 17% vs. the five-year average. O.C. new-home sales fell 37% to 706 units.”

“Inland Empire: 1,707 finished homes for sale up 29% over 12 months and up 25% vs. the five-year average. Riverside and San Bernardino counties have 2,616 units under construction, down 25% in a year and down 9% vs. the five-year average. New-home sales fell 14% to 1,667 units.”

The Los Angeles Times. “David Lee, the former basketball star who played for the Knicks and Warriors, has sold his unfinished condominium at the Sierra Towers in West Hollywood for $11 million. The transaction chalks up as a loss for the two-time all-star, who originally sought as much as $22.5 million for the oversized spread. He bought the property in 2017 for $13.5 million.”

“During his ownership, Lee worked with Intension Design’s Joseph Moore to remove walls and maximize unobstructed views extending from city to ocean. Floor-to-ceiling windows and sliding doors look onto a terrace balcony that runs the entire length of the unit.”

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This Post Has 38 Comments

  1. ‘3,750 new homes went unsold in the four counties’

    That’s up around 300 from the previous report.

    Wa happened to my shortage Southern California?

    2. The inventory of far flung stately redoubts in the peripheral areas of San Diego is ballooning like Violet Beauregarde in Willy Wonka and they are still building more.

  2. ‘The transaction chalks up as a loss for the two-time all-star, who originally sought as much as $22.5 million for the oversized spread. He bought the property in 2017 for $13.5 million’

    Well Dave, it was cheaper than renting. Oh, it was a flip. You got schlonged.

    ‘During his ownership, Lee worked with Intension Design’s Joseph Moore’

    I bet that was pricey. Just add it to the loss.

      1. Speaking of Oh the horror! Seems like that Doomed realtor JohnDave has gone missing. Mabye found shelter in a jail after being caught living in his clients walls 🤔

  3. ‘L.A. has 4,231 units under construction…L.A. new-home sales fell 32% to 615 units’

    ”O.C. has 1,982 units under construction… O.C. new-home sales fell 37% to 706 units’

    ‘Riverside and San Bernardino counties have 2,616 units under construction’

    That’s over 8,000 on the way!

    1. A year ago I attended a planning meeting in Cathedral city, CA for a continuation of building in an established community that had 200 foreclosed lots.
      The builder was to start late fall of 2018 or early 2019.
      Nothing but crickets and weeds.
      Del Webb in Rancho Mirage stole his thunder.
      He’d be a fool to start now.

  4. “Local builders are struggling with numerous selling challenges.

    Nope, just one. Your shacks are way overpriced. They’ll emerge from the foreclosure auctions priced more realistically, I expect.

    1. LOL at the article blaming high interest rates for slowing the sales of “the more affordable parts of the market”.

      No one in this generation has a clue what high mortgage rates are like.

      1. Rates are substantial lower right now then they were a year ago.
        Have been since Mid-January.

  6. What if the pin that pricks this bubble is not interest rates hikes (they don’t dare) but debt exhaustion i.e., the inability to service existing consumer and corporate debt.

    The chart shows the trend line of Fed Fund rates. The pattern is lower highs and lower lows. Debt burdens are so high and
    servicing that debt is so precarious that the latest round of interest rates rises had to be capped at 2.5%, less than half the last rate cycle peak.

    Looking at the Total (consumer) Debt Balance total mortgage debt is still below the 2008 peak (by about 3%), other household debt (credit card, auto and student loan) is almost 50% higher. Total consumer debt is now about 8% higher than 2008

    The corp debt balance seems considerably worse, with $3.5T coming due in the next 3 years (about $925B of that is “high yield” aka junk). All this, in an economic expansion.

    Maybe that’s why the Fed did such a sudden about face. They know that the debt bubble cannot withstand a recession (higher unemployment, lower profits) without widespread defaults. And those defaults will cascade.

    1. Interesting consideration.

      The inflation in the money supply has not found its way to most people.

      A combination of factors like these could be going on for a while and the MSM/Pundits/Experts would mostly miss it and the impact it was having – preferring to blame more favored bogeymen.

    2. “What if the pin that pricks this bubble is not interest rates hikes (they don’t dare) but debt exhaustion i.e., the inability to service existing consumer and corporate debt.”

      You nailed it. Come work in Escrow and your jaw will drop with all the consumer debt loads that too many have. People have no idea. I do.

      Remember, all this borrower qualifying is based on gross income (not take home pay). So the “real” income or DTI ratio’s are understated.

      Until I got into the escrow biz, I had no idea. That’s why I have always said it is important to “look under the hood of the home sales: what’s financing them?”

      The folks that purchased within the last couple of years that are highly levered (ie, VA, FHA and people doing cash out refi’s shifting all their debt onto their home, etc.) might be in a world of hurt.

      1. S-Crow

        in the early 1990s I worked in the early version of what today we’d call an internet lender. DOS based software automating the Refi offers you would get from a CPA as he did your taxes and discovered you could save money with a refi. I did the software for pulling down the latest rates via dial-up modem, Application & preliminaries, printing and filling out out the forms, submitting, etc.

        ….And I got to see the applications that came in…

        I was a young man then.. and it scared me straight when it came to finances and my credit report. I learned most people had no idea when they shouldn’t be taking out a mortgage, as well as how much debt people would run up when they had one.

      2. It’ll be both. This is a country addicted to low interest rates. The thought of saving money and managing your finances is long gone. The thought of purchasing a house or car and having a plan to pay it off do not exist. As long as people can make their monthly nut they will believe they are successful! I’m not telling anyone on this blog what they don’t already know, but millions need to heed this lesson or they will be SOL for many, many years!

        1. Interesting to say that.

          I very much have a plan for paying off our home within 10 years. I NEED to, if I want to be in position to stay here and enjoy my retirement years.

          My father on the other hand has a old-school state pension from 35-years in the system which he got quite high in. They’ve moved a bit, and he’s never had a paid off house. They just bought a waterfront condo last year near where I grew up, and their fixed retirement income is more than enough to keep their cash flow positive, so he has zero incentive to pay it off (which otherwise will happen when he is 105)

          1. Kind of reminds me of this quote by J. Paul Getty:

            If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem. – J. Paul Getty

    3. Mike-
      I’m no economic “wizard” like the Wile E. Coyote “super geniuses” at the Fed and other central banks, but I think you’re right on the mark here. The problem is debt, and yes, we’ve reached debt saturation/exhaustion (again). Yes, it’s everywhere, private, public, corporate. Kind of like poop on the streets of San Francisco. Just can’t seem to get rid of it. Borrowing our way to prosperity serfdom.

      Key fact: A sovereign nation, just like a family or corporation has a “balance sheet”. Assets (A) vs. Liabilities (L). When L>>A, there’s trouble brewing. I’m expecting a wave of sovereign defaults, BKs, etc. There’s no getting away from this fact. MMT=BS. Need a healthy balance sheet. Economics 101. Anything else is propaganda trying to convince you otherwise. Good luck with that.

      “The rich rule over the poor,
      and the borrower is slave to the lender.” – Proverbs 22:7

      “You cannot spend your way out of recession or borrow your way out of debt.” – Daniel Hannan, Member of the European Parliament

    4. What if the pin that pricks this bubble is not interest rates hikes (they don’t dare) but debt exhaustion

      Yes, I think you are definitely on to something there.

    5. “Maybe that’s why the Fed did such a sudden about face. They know that the debt bubble cannot withstand a recession (higher unemployment, lower profits) without widespread defaults.”

      Adjusting interest rates cannot prevent a recession. However, I totally agree with you regarding the total consumer debt. The fed has enticed consumers and corporations to bury themselves with their sustained low interest rates. We are now riding the proverbial tiger, and it’s up to Powell to get the indebted off without being eaten. Got HBB popcorn?

  7. “Builders bet too heavily on the upscale market, which has been hurt by a pullback of foreign, mainly Chinese, buyers. The more affordable parts of the market have been slowed by higher mortgage rates.”

    But but but lower interest rate than this time last year?

    1. Crater? I admire your persistence at coming up with diverse scare mongering headlines but Redmond’s price per sqft is positive YoY. The high end is declining but the low and medium tiers are rising in King County. Crazy but true.

      1. You’re scared? I’m not.

        And Redmond housing prices cratered 17% and falling fast.

    1. Nice. Finally an example of someone who could see the trap they were walking into and forfeited the deposit (chewed off a paw) to be able to walk away and live to be free another day.

    2. “Clients nowadays only want something practical and simple that saves money instead of going for the luxurious,” Zhang said as he fitted out a client’s new apartment with contemporary furniture and gray ceramic tiles.

      I guess their Internet censors need to add RE to their queries.

  10. Kramer rant alert!

    Autos
    Ford to cut 7,000 jobs by August, including 900 this week
    Published Mon, May 20 2019 9:20 AM EDT
    Updated Mon, May 20 2019 1:49 PM EDT
    Ashley Turner
    Key Points
    – Ford is laying off about 10% of its global salaried workforce, the company said Monday.
    – The job cuts are part of the companies restructuring effort and is expected to save the No. 2 automaker $600 million annually.
    – Most of the reductions are overseas with roughly 2,300 of the job cuts coming from the United States.
    …

  11. Got to talking to a guy in Portland at my hotel yesterday who said he left construction – too many ups and downs – for – wait for it – tattooing. He had the full sleeves, all colored and says business is better, especially when he works on “high end” clients. I didn’t ask what that meant, maybe those without felonies or those that have most of their teeth. Young guy, probably under 30 and said even his grandma has a tattoo. That’s what this country has become, a nation of circus side show freaks. I didn’t see what he was driving but I’m guessing by his size (short) it was one of the big shiny trucks in the parking lot.

    1. “I didn’t ask what that meant, maybe those without felonies or those that have most of their teeth.”

      A friend who works in a neonatal unit said a high-roller female exec was admitted for delivery. They smiled when they saw that her hood was pierced.

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