My morning hours are normally spent looking the Santa Clara County MLS (Multiple Listing Service) to see what homes have come on the market, which ones have reduced price, and which homes are now pending sale. Friday morning, I was up earlier than usual to hear a fascinating panel discussion from the other end of the new-home process: The financiers and developers who create housing in the South Bay. It provides real insights into the home designs and styles we see at the Open Houses, and why they are priced the way they are. The panel was sponsored by the Urban Land Institute, which describes itself as a global research and education institute dedicated to responsible land use. Held at the Rosewood Sands Hotel in Menlo Park, California , the discussion was on the future of housing with a panel on “Who Wants to Build a House?”
The panelist consisted of Phil Mader, Managing Director of real estate investment firm Blackrock, Robert Freed, President and CEO of developer Summerhill Homes, and Mark Kroll, Principal, Sares Regis Group, another residential developer. The moderator was Phil Levine, Partner, Morrison Foerster attorneys. The discussion centered around the issues affecting home building, including financing of projects, challenges to building in Bay Area, and thoughts on where the housing market may be heading.
The discussion started out with how to find the right land deal and combine it with the right financial backing to survive the unknown of the housing market future. The panelists explained how conservative planning to secure financial futures was a daily decision for their groups. They focused a great deal on the lack of profitable land investment for homes and how local municipalities can drive the process through general plan initiatives and regulations.
The home buyers I am working with, want new construction. They are either second generation immigrants or simply Bay Area born tired of living in 1950 homes. They want walk in closets, they want walk-able neighborhoods, they do not want to spend two hours a day in traffic. They want a home with space to entertain with friends and they want homes that have enough yard to enjoy the California weather. They want affordability. They want efficiency. They want it for a buck and a half.
Robert Freed CEO of Summerhill explained that although his company had made a business commitment to go with solar in all new homes, potential home buyers would “Choose to upgrade the kitchen cabinets over paying for solar.” He continued, “They want ‘green’ technology but they do not want to pay for it.” This reflects what I see in the home market as well. As a certified green® real estate professional, I discuss with home owners how to boost resale with green through energy efficient remodeling. They are skeptical, believe it is too expensive and do not see a clear future value. I do believe as marketeers of the home market we must provide better proof for the need and value of green technologies in homes before the consumer will make the investment. Phil Mader with Blackrock summed it up well: “We are starting to see more value in building a more efficient home. Whether it is square footage or efficiency. People want a good deal. How do we provide value that leads to the competitive advantage for the consumer and industry?”
The discussion around land purchases and working with municipalities to build what home buyers are looking for explained why we are lacking new homes in the area. San Jose in particular is limited to “in-fill” building. In other words, most of the opportunities to build are in old light industrial areas which rarely can boast “walk-ability” and maybe more important, good schools. I knew this to be an issue after listening to the San Jose Vision 2040 plan. Great idea to build new communities that allow more walking, mass transit options, with shopping and dining galore, but the reality is you need good schools in those neighborhoods as well. Want better resale? Improve schools. Do not stick a new community in the middle of old warehouse neighborhoods and expect educated buyers looking to start a family to flock there. The panelists also highlighted the fact that the investment was not there for single family homes as much as rentals and indicated the apartment builders will have more opportunities in the local municipalities.
Finally, the discussion on where the market is and where it is heading. All the panelist agreed that the word “recovery” did not exactly define what they were seeing in the market place. All felt that the market may be near or at the bottom but also believed the “curve coming out” will be based or more conservative lending decisions which will slow appreciation for years to come. Phil Mader with Blackrock stated the “Government intervention of the past two years sent false signals to the market.” I agree that government intervention completely derailed the free market economy of sorting out the issues. However, honestly, our country was is no way prepared for the hardship that was set to take place.
Mark Kroll with Sares Regis Group summed up the future housing market “headwinds” well by saying, “There is a fundamental demand caused by immigration and shifts in population for new home development but we expect to see higher interest rates, higher down payments, GSEs (Fannie Mae & Freddie Mac) going away which will require lenders to hold more reserves, and this will push mortgage insurance higher.”
Ending on the positive note, all the panelists agreed that the Bay Area was unique to the rest of the country by the fact that there were jobs and a location with high desirability. The panelists believed that demographics, jobs, and desirability of the Bay Area would keep demand coming and that all developers would find new ways to meet that demand. As most believe, there is no going back but the going forward presents interesting opportunities in the types of homes that will be built, types of consumers who will be purchasing, and types of changes for municipalities to support future neighborhoods.
Special thanks to the Urban Land Institute for inviting me to attend this interesting discussion.