Construction costs hamper housing starts

January 18, 2017

 

new homesSTOCKTON — Those hoping to ring in the new year with a search for a new house should bring a lot patience and cash. If the buyer is hoping to find a newly constructed home, a lot of luck wouldn’t hurt.

“We have very little inventory overall,” said Grupe Real Estate Realtor Beverly Lamontagne. “It’s because we aren’t really building.”

New construction in the Central Valley is something of a mixed bag heading at the beginning of 2017. While there are some new developments in Lodi, Ripon and southern areas around Merced, larger cities like Stockton and Modesto are largely still silent.

In Stockton, the number of new housing permits has fluctuated between 500 and 1,000 since 2008. By contrast, nearly 3,000 permits were pulled in 2006.

The area is seeing anemic new construction despite high demand in the Valley. Current housing inventory in Stockton was under two months for most of 2016. Soaring prices in the Bay Area has sent a flood of buyers over the Altamont pass.

“Because we have such limited inventory, houses are going almost the day they make it on the market,” said Lamontagne. “We have agents driving to Patterson to find places for buyers.”

Despite the demand, the area’s largest cities are still seeing little in the way of new construction. The reason has to do with the pricing associated with new construction.

In Stockton, the current median price for a three-bedroom, two-bathroom, 1,600-square-foot house is $249,000. A new house that size costs nearly $350,000 to build. Fees make up a big part of those costs. In Stockton, permit costs can add $60,000 to $80,000 before a new foundation is even in place.

Stockton wasn’t alone in tapping into that revenue stream after the housing crash. Permit fee increases were common across Valley communities between 2007 and 2014.

When home prices crashed, property values were re-evaluated at the lower values. That resulted in steep declines in property taxes for area cities. To fill budget holes and lessen the impact to services, cities looked to building fees to help fill some of the gap.

For some cities, it worked and with an improving economy, they are beginning to dial back those fees. The increases weren’t enough in Stockton as the city descended into bankruptcy. The resulting bankruptcy agreement, as well as the way the fees were structured, limits what the city can do in terms of reducing them. Last year Stockton reduced its building fees by up to $20,000, but it hasn’t been enough to spur significant construction.

“Grupe was going to finish Charlotte Oaks off West Lane, near the Calaveras River,” said Lamontagne. “They thought they would restart the development later this year (2016), but instead they are building in Lodi starting at $400,000. We have a got a long way to go to get new housing in Stockton.”

Despite the anemic overall numbers, there are pockets of new construction. In Modesto, work continues on the 114-home Rose Park subdivision on Mable Avenue. Lodi, Ripon and Manteca also have scattered developments.

“I am seeing a some more building,” said Coy Knapp, sales manager and Realtor at Coldwell Banker Castle Real Estate in Modesto. “If builders build these homes that can use FHA loans, that will help improve affordability.”

He said the conclusion of the presidential election and the ensuing interest rate jump is spurring some builders and buyers to get off the fence.

The overall housing market looks steady and new home builders do have some momentum heading into 2017.

Merced County housing starts were up 132 percent in the third quarter of 2016, according to Metrostudy which provides market information to the housing related industries.

Stanislaus County saw a 60 percent increase in housing starts and even San Joaquin County saw a 13 percent jump.

While those percentages look impressive, the overall numbers are still small. Merced expects to issue around 100 new home permits this year. During the height of the housing boom, Merced developers pulled more than 1,600 permits.

Developments that are built sell out quickly.

Benchmark Communities, which recently completed the Cornerstone development in Ripon is already sold out. The company is now working on a 130-home development off of Ripon Road.

“We are finding efficiency and value in volume home building,” said James E. Jimison, president of the Central Valley Division of Benchmark Communities. “I think Ripon was a good case. It has a high-quality school district. They also were helped by inflated prices in the Bay Area.”

One difference today is developers are not carrying the inventory they once did.

“We aren’t going to buy as large a project,” he said. “Builders will be building fewer spec homes. You won’t see any builders building more than three to four inventory houses at a time.”

Still, builders are slowly returning to the market. Benchmark has increased its developments in the Central Valley from eight in 2014 to 11 in the last year.

“I do see more managed growth,” said Jimison “I don’t think you will see a big spike, but you will see growth.”

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