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Many new homes selling below costs

It’s about cash management instead of profit

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Many new homes selling below costs

Construction crews work on a Florsheim Home on Heartsong Drive off Airport Way in South Manteca.

HIME ROMERO/The Bulletin


POSTED January 9, 2010 3:37 a.m.
Most Manteca new home builders aren’t even breaking even these days on their investment despite enjoying a robust year in comparison with the rest of San Joaquin County.

“It’s about cash management now,” noted Florsheim Homes Chief Executive Officer Joseph Anfuso. “We’re doing what we can to keep building.”

Florsheim Homes is developing the Valley Park and Deer Park neighborhoods off Woodward Avenue west of Airport Way.

The problem Florsheim and virtually every other new home builder in California is facing that was caught with a project either just starting or partially built out when The Great Recession hit is that they have millions tied up in project and neighborhood development that they are paying interest on. They need to keep selling to avoid severe financial problems that have led some developers such as Beck Homes to go into bankruptcy. Beck Homes was the developer of the 480-home Oakwood Shores to the west of Florsheim’s development just outside Manteca’s city limits that went into bankruptcy with only about a dozen homes built.

There are seven subdivisions that have 897 finished lots in Manteca that are ready to have homes built.

Anfuso noted builders are competing against a resale market in Manteca that saw 1,211 existing homes close escrow in 2009 at a median selling price of $178,000.

That is $123,079 less than what it costs to buy land, gain project approval, cover growth fees, make site related improvements, market, and build a 2,000-square-foot home in 60-acre subdivision with 250 housing units. Builders have noted that is why it is a great time to be a buyer of a new home since many are selling below what it actually costs to build them.

The “typical” development costs was put together from research conducted by Public Works Director Mark Houghton to give the City Council a clear picture of what the dynamics are of the new housing market in Manteca. The council has expressed a desire to find ways – without impacting the city’s finances – to get construction trades working again in Manteca. The housing market in terms of primary jobs, secondary jobs and so-called multiplier jobs in retail and the service industry represents the main engine of the Manteca economy.

Manteca last fiscal year had almost 60 percent of all the housing starts in San Joaquin County with 237 out of the 414 starts.

Even so builders like Floreshiem have had to lay off workers. In Floreshiem’s case, that is 60 in-house jobs plus a small army of contactors who employ hundreds of tradesmen. In turn, material orders create dozens of direct jobs in transportation and the supply side of the housing industry.

Anfuso noted his company’s subdivision has an area of 50 approved paper lots that as things stand now he sees no way that the dirt will be turned to build homes in the next three to five years due to incurring site costs that they can’t retrieve due to the current housing prices.

There is still a fair amount of homes being built in some neighborhoods that are selling in the upper $300,000s. But the bulk of the buyers that fuel new home construction are being lured by foreclosures that often offer homes built in the past five years at substantially lower than the actual cost of building a home new.

It costs $121,079 to just finish a typical lot
That model that Houghton devised came up with land acquisition, financing, and closing costs at $18,200 per home. Project approval costs such as environmental studies and various city fees add another $1,800 per home. Offsite construction improvements – everything from streets to landscaping and sound walls – add another $11,920. On-site improvements that are basically the infrastructure within the subdivision’s boundaries from street lights, pipes, sidewalks to installing utilities and then turning them over ready to go to PG&E, Verizon and Comcast – adds $23,826.

The building fees and growth fees add another $48,464.

That brings the cost to finish a lot to prepare it for building to $121,079. The house construction at $75 per square foot is a $150,000 cost plus there is a $30,000 cost for sales and marketing to bring the final tally in at $301,079.

If builders can secure $300,000 net for the home after selling costs are covered they will still lose money, roughly $1,079. In many cases homes are indeed selling below the cost of the finished lots as a way to keep developers ahead of the loans and to retrieve in-ground investments.

How developers are doing it is by essentially writing off the cost of the land – or $18,200 per home. There are tax consequences that can help somewhat but the real advantage is it significantly reduces losses per lot. If a developer can reduce losses significantly they can stay afloat.

On the flip side, the city factored in a certain growth rate to project their ability to pay back bonds for things such as the wastewater treatment plant and surface water treatment plant. That number is being prepared by municipal staff for the council housing subcommittee of Debby Moorhead and Hernandez so they know what the bottom line is for the city’s stake in the housing market. The city traditionally has taken the historic growth rate and used a number that’s anywhere from 25 percent to 50 percent lower to build in cushion on top of a reserve for debt repayment when it involves financing growth-related projects.

Some developers have lobbied for a reduction in fees. That has been the pitch the Building Industry of the Delta has been using with cities throughout the county.

City exploring strategies of reducing costs and still getting infrastructure
City Manager Steve Pinkerton has noted that the city can ill afford not to be whole when it comes to the cost of infrastructure.

‘”Giving up 30 percent now increase our expenses 30 percent down the road,” Pinkerton said.

Instead, Pinkerton said municipal staff is trying to find ways to work smarter by reducing processing times and coming up with a more effective way to finance off-site infrastructure that projects require.

It may involve revisiting Manteca’s policy of making each developer pay for 100 percent of the costs of a major improvement they trigger. For example if a project happens to include where the city has determined there needs to be a water well, that development would pay the $2 million and wait for other growth to occur to retrieve their money. That could take years and adds to the costs of the project. By spreading all such costs across all development it would allow improvements to move forward faster with lower carrying costs for the money involved.

Doing business that way could take the cost of fees per house down from 21.9 percent of a $300,000 sale to as low as 17.1 percent with the city still getting the improvements they require.

Other strategies may involve rethinking levels of servcie for traffic to allowing certain fees to be paid before escrow is closed instead of when the building permit is issued.

The rationale are fees such as water and sewer connections that account for $7,761 of that typical home’s $48,464 cost in building fees aren’t needed until such time the toilets are being flushed and water is turned on. That’s because the city incurs no costs until the home is occupied. It would mean water and sewer service wouldn’t start until the fees are paid.
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