Is San Diego County done building single-family homes?

By Phillip Molnar / The San Diego Union-Tribune

SAN DIEGO —If you are looking to buy a new single-family home this year, San Diego County might be a tough place to do it.

Early estimates for the number of single-family homes coming out for sale this year are around 800, fewer than roughly 940 last year and 1,500 in 2017 and 2016. It reflects a trend of fewer and fewer traditional, detached homes as most building stays focused on apartments, and to a lesser extent, townhouses.

Preliminary estimates take into account developers’ projections for how many homes they will release in a given project. Guesses at the start of the year, at least for the last four years, are typically much lower than what ends up being built because developers will increase their production based on how well sales are doing.

However, a few things might be different this year. For starters, the end of last year was the first softening of the market in a while. Home price reductions picked up and sales hit their lowest points in years, which most analysts blamed on rising mortgage rates and local wages not keeping up with rising prices.

Developers might be taking a more cautious approach this year while they wait to see what the market does next, said Alan Nevin, industry analyst at Xpera Group. He said it seemed like for much of last year that developers couldn’t keep buyers away.

“They blew through their inventory in 2018,” he said, “and things started to really slow down in the fourth quarter. Therefore, they just aren’t starting as many in each phase now.”

Home builders say bigger issues point to a reduction in new homes: Community opposition to new projects, a lengthy process to get the green light from local agencies, lack of approved land for housing, increasing costs of labor and materials, as well as higher borrowing costs. An out-of-whack supply and demand is evident when considering single-family homes are the most desirable type of homes — not a condo downtown or townhouse — say several studies.

But it will cost to get into that home. The average price for new single-family homes this year is $800,000 to $1.2 million, considerably above average prices in San Diego County for older homes.

Nevin said housing costs for the builder make it unlikely a cheaper single-family home could come out even if they wanted to.

“The reality is these guys are paying like $300,000 for a 5,000-square-foot lot, and upwards of $125 to $150 per square foot for construction,” he said. “It’s not Las Vegas. It’s not Phoenix. Our costs here are substantially higher than most other places. You can’t put out a cheap house.”

New developments in San Diego County have not lowered prices to adjust to a weaker market, but have been offering more incentives. Some of the options include offering to buy points on a mortgage to lower the price for the first few years, and upgrades to the home or picking up closing costs.

New home development is mostly centered around Chula Vista’s Otay Ranch development and the Pacific Highlands Ranch development in North San Diego and Escondido.

Building trends show San Diego County has skewed toward multifamily building — apartments, condos, townhouses — for several years. Numbers through the first nine months of 2018 show 66 percent of permits were for multifamily and 34 percent single-family.

Otay Ranch

Chula Vista’s vast master-planned community, Otay Ranch, continues to be the county’s focal point for new homes and will likely stay that way for years. There are roughly 11,000 more homes to be built in the 25,000-acre area, which is the largest residential development in the county’s history.

So far, around 12,000 homes have been built and it is one of the rare places where a buyer can get a new single-family home for under $600,000.

Otay Ranch was listed as the No. 10 best-selling master-planned community in 2018 with 660 home sales, according to John Burns Real Estate Consulting. That’s up from 563 in 2017 and 159 in 2016.

Kent Aden, senior development manager for HomeFed Corp., the biggest landowner in Otay Ranch, has been with the project from the start. On a recent Tuesday, Aden crackled with excitement as he gave a tour of a village called Escaya, where many new homes are opening this year. Realizing the fruits of his labor after years of planning, he pointed out features on individual homes as workers painted walls and nailed pieces into place, and described the process that brought three developers into one project.

Outside of Otay Ranch, his hope for new single-family construction is more muted. “There’s less and less land, and more and more opposition,” he said.

Otay Ranch is different in that the master-planned community has already been approved and developers know how to comply with Chula Vista’s established so-called quality of life standards. That allows builders to ramp up production quickly with fewer hurdles than just about anywhere in San Diego County.

Sale plans for Otay Ranch this year call for more than 150 single-family homes but that could go up or down based on market conditions. Since the slowdown last year, many of the projects are offering incentives.

In the last three weeks, the Indigo homes in Escaya from developer Lennar have been offering $2,500 for closing costs (or to use for home upgrades), as well as offering to buy down the interest rate on a mortgage for the first two years.

Indigo’s homes range from $546,900 to $579,000, making them some of the cheapest new single-family homes in San Diego County. Also, compared to many hot neighborhoods in San Diego, the cost of an Indigo home is cheaper than a resale home.

Indigo houses have four bedrooms, three bathrooms and two-car garages. Other features depend on the home model, ranging from 1,950-square-feet to 2,165-square-feet. Architecture depends on individual units, but inspiration is largely Spanish, ranch or farmhouse style.

Diana Virissimo, 35, and her husband spent two years looking for a home in south San Diego County to grow their family, which now includes a 3 {-year-old son. And they wanted something that wouldn’t break their budget.

They looked at condos, townhomes, houses —sometimes visiting 10 properties a day —that were a mix of new and old. From Imperial Beach to Spring Valley and Encanto, their search was extensive and disheartening at times.

But, they finally found a single-family, new home in the Indigo neighborhood at Otay Ranch for around $570,000 in July. She said they were thrilled to get a house that had a yard, garage and the amenities that came with living in the village, such as a pool and gym.

“It is a feeling of, ‘I can’t believe this is our house,’” she said. “I walk into the door every day and I’m so grateful and feel so lucky.”

Some potential buyers might not find Otay Ranch as desirable as Virissimo does. For a normal 9-to-5 job in downtown San Diego, the commute ranges from 20 to 25 minutes in the morning and around 35 minutes in the evening. But, if a buyer worked in Sorrento Valley or anywhere in North County, it could make for a brutal commute.

Also, most of Otay Ranch falls under a Mello-Roos tax district, where a special tax is levied in addition to property tax to pay for infrastructure. In Indigo, that means around $4,400 to $4,700 additional taxes a year.

Still, the numbers don’t show either of those factors making a dent in sales. Aden said a major factor in HomeFed’s thinking about the market, which bets on continuing to build single-family, has paid off.

He said in the past decade there had been a lot of talk about millennials preferring an urban lifestyle and more of an openness to apartment or condo living than their parents. Despite that, Aden said they have found millennials share traditional values and often want to raise families in detached homes.

Otay Ranch’s zoning allows for more multifamily if needed but Aden said it also makes business sense to focus much of its building on single-family. It will still be years before much of the development’s infrastructure and transit are approved. Hopes for a university and major employers are still just that — hopes — and, until it happens, living in an apartment in Otay Ranch might not be the easiest sell.

The $1 million home

Prices for new single-family homes continue to rise and some of the priciest locations are in North San Diego County.

One of the most expensive projects, Sterling Heights, has homes from $1.8 million to $2 million and are massive by California standards, 4,936-square-feet to 6,540-square-feet.

The Spanish-style ranches, north of Black Mountain Ranch, have views that stretch for miles and feature four to five bedrooms, modern appliances that come with the house, “smart home” features such as wireless Internet boosters and thumb print locks, spa-inspired bathrooms, gas fireplaces, walk-in closets that are bigger than some San Diego apartments, open concept living rooms, game rooms and spaces for pools or hot tubs.

Sterling Heights is a Lennar project, which isn’t exclusively building high-end. It’s also responsible for two of the cheapest new projects in San Diego County, Otay Ranch’s Indigo and Valencia that start at the low-end of $546,900 and $562,900, respectively.

“We recognize (less expensive) homes as a need,” said Bill Ostrem, a division president for Lennar’s CalAtlantic Homes division, “but there is a need across all price points.”

Sterling Heights is unique in that it is part of Lennar’s Next Gen concept, which includes a smaller wing of the house that can function as its own apartment. The idea is aging parents, or recent college graduates, can still live with the family but have privacy.

Everything you’d imagine is there —a bedroom, washer and dryer, bathroom, small living room, dishwasher, microwave and sink. Most importantly, it has a second entrance. Ostrem said a focus on multi-generational living has been a huge hit for Lennar and something they plan to continue to include on many new projects.

Sterling Heights isn’t the most expensive project in the region this year, with signs popping up around the county advertising homes “in the low $1 millions.”

Some of the most expensive new, single-family home projects are Carmel in Pacific Highlands Ranch starting in the low $1.4 millions; Palomar in Pacific Highlands Ranch, starting at $1.9 million; and Vista Santa Fe in Pacific Highlands Ranch in the high $1.7 millions.

The big picture

San Diego County is the fifth most-populated county in the United States, and the population has been growing about 1 percent a year since 2000. But, it is also one of the largest, at 4,525 square miles. For context, that’s more than half of New Jersey.

Looking at the county from space, it would seem like there is plenty of area for whatever type of home imaginable —especially if you don’t mind living on a mountain or in the desert. However, the geographic, practical and political barriers to more home building have largely contributed to focus on construction of apartments, condos and townhouses. All of that means the stock of traditional single-family homes —like you might see in North Park, Mission Hills or Oceanside —continues to go down.

Nathan Moeder, principal with real estate analysts London Moeder Advisors, said there is a lack of what he calls shovel-ready land for development, meaning lots of land where builders are trying to get entitlements and approvals.

“With all the NIMBY(not in my backyard) stuff, all the initiatives trying to curb growth, that’s why we just don’t have the pipeline of projects,” he said.

Moeder said major homebuilding site Otay Ranch is too far from job centers, whereas big job hubs in North County are way behind in new home construction.

“I think it is going to be a struggle to get single-family home projects approved,” he said, “which translates to lower inventory for sale.”

There may be some change on the horizon. Political pressure to build more housing is growing in Sacramento, especially with the recent election of Gavin Newsom as governor, who made a push for more housing a campaign talking point.

On Jan. 10 at the state budget presentation, Newsom threatened to withhold state tax dollars from communities that don’t approve enough housing. Although the state requires local governments to plan for housing, it doesn’t penalize them if they don’t follow through.

To meet those goals, an assumption might be that communities would react by building more multifamily. Chris Thornberg, economist and founding partner of Beacon Economics, said that probably won’t be the case because the demand and need for both types of housing are so high it would be hard to notice a difference.

“In our world, the shortage of multifamily and single-family means that anything that could be built will be needed eventually,” he said. “In a supply-constrained environment, the kind of shift you’re seeing won’t be very dramatic. If you increase housing in multifamily by 50 percent, you’re still not going to meet demand.”