Sales of new houses fall 57%

Region's builders try to lure buyers with lower prices and free upgrades.

By Andrew LePage -- Bee Staff Writer

Published 2:15 am PST Friday, January 13, 2006
Story appeared on Page A1 of The Bee

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In some cases, builders are simply lowering their prices. For example, KB Home, one of the region's largest builders, recently cut prices on many homes 3 to 5 percent to stoke sales, said Jefferey Fautt, the builder's local division president.

"Sacramento has always been a nice, affordable market, and our prices just got a little too aggressive," said housing analyst Greg Paquin, whose Folsom firm, the Gregory Group, collected the data.

"So there are some price adjustments in some (areas) right now."

The Gregory Group found that the 1,569 new homes that sold during last year's fourth quarter marked the lowest total for any quarter since the firm began tracking sales in late 1999. The sales were in Sacramento, Placer, El Dorado, Yolo, Yuba and Sutter counties.

The slower market helped nudge down the median sale price - the point where half of the homes sold for more and half for less - for new homes in the six-county region to $456,619. That's a decline of just under 1 percent compared with both the previous quarter and the fourth quarter of 2004, the Gregory Group said. Sales dropped 57 percent compared with the previous quarter as well as with the same quarter 2004.

Increasingly, consumers are realizing the market pendulum has swung in their favor, and they're out looking for deals.

On Tuesday morning, David and Darlene Hillsman of Natomas were scouting a KB Home subdivision called Westbury in Natomas on behalf of their 35-year-old daughter, who lives with her husband and 5-year-old twins in a 800-square-foot apartment in Sunnyvale.

"Now is the time to buy," said Darlene Hillsman, adding that she and her husband are pushing for their daughter to move her family to Sacramento.

Craig and Kristina Meadows benefited from the slower market in November by taking advantage of $38,000 worth of incentives their builder, Morrison Homes, gave them on their $588,000, 3,700-square-foot home in Lincoln.

Craig Meadows said they received $30,000 off the base price in exchange for using the builder's designated lender. In addition, he said, the builder reduced the price another $8,000 to compensate for two years of Mello-Roos fees the Meadows would have otherwise had to pay to cover the cost of streets, sewers and other infrastructure in their Lincoln Crossing neighborhood.

"The incentive was the determining factor to go ahead and buy it," said Craig Meadows, who with his wife and 7-year-old daughter moved to Lincoln two years ago from Southern California.

"If they hadn't given it, we probably would have just kept on looking."

A Morrison spokesman could not be reached for comment.

The value of builder incentives in last year's fourth quarter averaged $8,965, nearly double the average during the prior quarter, the Gregory Group reported. Builders usually offer the greatest incentives for homes that are under construction, if not completed, but have no buyer because the initial buyer backed out.

The widespread decline in sales, however, did not lead to an equally sweeping drop in median sale prices for new homes. In some areas, Paquin said, the median price moved up or down mainly because of changes in the types of homes being built, rather than because of rising or declining home values.

For example, in Natomas the median price in the fourth quarter dropped 16 percent from a year ago, but Paquin chalked up most of that decline to the construction of far more lower-cost condos and small-lot detached homes in late 2005 compared with late 2004.

El Dorado County's median price in the fourth quarter - $659,840 - fell nearly 12 percent from the prior quarter but was still 19 percent higher than a year ago. Paquin said the county saw significant price increases in the first half of 2005, coupled with a sharp rise in the number of large, $900,000-plus new homes hitting the market.

The result, he said, is that even though El Dorado's high-end market has softened, the median price remains higher than a year ago.

Despite the local market's softness, many analysts expect sales and prices to rebound slightly in the spring. They say the boost will be driven by relatively low home loan rates and the region's continued job growth. Moreover, they note many builders are quickly adjusting to market conditions, not only with incentives and price reductions but by building more lower-priced condos and small-lot detached homes that more buyers can afford.

Fautt and others say they've seen a resurgence in homebuyer traffic since Jan. 1.

"In our minds it is not a matter of the sky is falling - it's a matter of reaching that equilibrium point between the supply and demand for housing in the region and positioning us for more sustainable long-term growth," analyst Paquin said.

He expects builders to construct about as many homes this year as last, but with more of them in lower price categories.

Economist Chris Thornberg of UCLA's Anderson Forecast said the Sacramento region's 57 percent decline in sales during the fourth quarter "sounds too dramatic to me to be realistic." Paquin said he's carefully rechecked his builder survey and is confident in the results.

Thornberg's surprise at the extent of Sacramento's slowdown is telling: For two years he's had one of the more negative outlooks on housing among the state's economists. He characterizes California housing as being in a "bubble" that will eventually deflate with a severe decline in sales and a halting of price appreciation - but not necessarily sharp drops in values.

Thornberg said he's particularly concerned about markets like Sacramento, where he said much of the region's job growth has been tied to the housing boom. As the market cools, many real estate-related jobs will disappear, he said, and without appreciation people will feel less wealthy and spend less.

"This can reverberate throughout the economy," Thornberg said "It's not constrained to the real estate market."

Sacramento economist Robert Fountain, who's long tracked the local housing market, said he expects only high-end homes to suffer erosion in values. He said the over-$600,000 market has been saturated and builders will respond with more lower-cost units, packed more to the acre.

That trend is well under way: In the fourth quarter, 26 percent of the six-county region's 254 housing projects were selling condos or detached homes on lots smaller than 4,000 square feet, the Gregory Group said.

A year earlier such high-density housing made up just 8 percent of the projects.

About the writer:

• The Bee's Andrew LePage can be reached at (916) 321-1065 or alepage@sacbee.com.

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