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Southern California New Home Market Trends and Strategies—4Q 2019

October 22, 2019

Los Angeles

  • Negative fallout from the passage of Proposition JJJ in 2016 is beginning to be felt in the new home market as the pipeline of for-sale slab-on-grade housing projects in the City of Los Angeles dwindles. Total permits in the entire LA MSA are down 22% YOY.

  • New home inventory (homes released for sale but not yet sold) in Los Angeles is down 13% year over year. Los Angeles is the only Southern California market showing a year-over-year decline in new home inventory. Inventory reduction provides some support for new home prices.

  • With an array of attainably priced new housing options available from townhomes to conventional single-family detached, the Santa Clarita market will continue to outperform the rest of the region on both a price appreciation and pace basis.

  • Home builders are hopeful that Newhall Ranch will release the first phase of lots for sale by the end of the year. Site improvements are underway for Phase 1 of Mission Village at Newhall, which includes 1,072 homes in 15 planning areas (73% attached for-sale product).

Orange County

  • Broadly speaking, $1.0M is the dividing line between relatively strong demand (under $1.0M) and relatively weaker demand (over $1.0M). The continued pullback of Chinese home buyers is negatively impacting the demand for new high-end homes.

  • With less overall demand, many home builders have reduced net prices by 5% or more year over year. Broker co-ops of $100K or more are not uncommon at the very high-end ($2.0M).

  • Lower interest rates and lower prices are expected to translate into faster new home project sales rates in 4Q 2019 (+/-2.0 sales per project per month) vs. 4Q 2018 (1.4 per month).

  • Suburban masterplans such as Rancho Mission Viejo are pivoting future phases towards higher-density products with smaller home sizes to help bring home prices down to attainable levels.

Inland Empire

  • September 2019 was the best September in five years for new home project sales rates (3.3 sales per project per month vs. prior 5-year average of 2.8). There is particularly strong demand for attainably priced townhomes and sub-FHA single-family detached homes.
  • Despite strong sales, new home inventory levels are up over 50% vs. the same time one year ago as the market continues to work through the inventory build-up that occurred at the end of 2018.
  • High inventory levels are translating into pricing weakness, despite low interest rates. Based on field surveys, net revenue per new home is down 2% to 6% year over year (varying by market area, product type, and price).
  • Expect an escalation of incentives in 4Q as the biggest publicly-traded home builders look to entice sales to boost fiscal year-end closings and reduce inventory.

San Diego

  • Expect to see a decline in the number of active new home communities, as no new masterplans are slated to open for at least the next six to nine months.
  • Almost 50% of active projects now on the market likely will be sold out in the next 12 months.
  • Illustrating the depth of demand for reasonably priced homes (by San Diego standards) in a location with great schools, Lennar’s new Pacific Village community in Rancho Penasquitos has generated 42 sales across three product lines in just over five weeks since opening in late July (with no model homes yet).
  • The biggest issue with San Diego is that although interest rates have declined, thus making homes more affordable, high absolute prices still limit the number of people who can afford newly constructed homes. (The median new home price is $710K.)

With lower interest rates and slightly lower home prices in most areas compared to the same time last year, new home sales rates across all of Southern California will be better in 4Q 2019 than in 4Q 2018. However, higher incentives will linger and carry over into early 2020.

Whether you are in site acquisition due diligence, looking for innovative and pioneering new products, or determining your business plan for 2020 and beyond, our Southern California consultants are here to help you understand, strategize, and navigate the market.

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