Orange County housing transitioning from single-family homes to high-density condos
Orange County is no longer an LA County bedroom community. High-density condos overtake suburban detached homes as the dominant housing type.
I recently noted that The FHA loan limit dooms McMansions in California. The FHA loan limit creates a down payment barrier that first-time homebuyers simply can’t overcome. The down payment barrier forces residents to take one of three actions: (1) they move inland to find an affordable single-family home, (2) they substitute to a smaller attached home near work, or (3) they rent.
For most OC residents, moving inland to find affordable housing means leaving Orange County entirely. Those who continue working here endure crushing commutes.
So far, the Millennial generation opts to rent. Burdened by excessive student loan debt, restrained by low-paying jobs and poor wage growth, and drained by high rents, Millennials fail to save for down payments, sidelining them for the foreseeable future. Most rent out of necessity rather than desire, but now with rising mortgage rates and rising prices, ownership is beyond reach. Many become part of an underclass of transitory renters serving the landed gentry who already own property in Orange County.
Those who want to remain in Orange County must accept a smaller attached home because there are simply no detached homes available for buyers with less than 20% down. Further, this is not likely to change. Residents of Manhattan Island long ago gave up the dream of owning a detached single-family home. In Southern California, we clung to this ideal longer than it was practicable, and now it’s time to leave this dream behind.
What builders and developers bring to market
Builders and developers respond to market conditions and provide the products the result in the most profit. They could undoubtedly build and sell houses on five-acre lots, but that wouldn’t maximize revenue or land value, so they strive to find the best combination of price and yield. With the absence of the first-time homebuyer, homebuilders provided products for the move-up market, and the new home median price soared. Rising rents also stimulated demand in the multi-family market, and over the last several years, apartment development dominated the market.
When high-density projects come to market, they generally remain rentals for the first ten years. After 10 years, homeowners can’t file lawsuits for construction defects, so to avoid this costly insurance, many condos remain as rentals during this initial ownership period.
The high-density apartment projects built today may become the entry-level homes offered 10 years from now. When apartment developers want to liquidate, they have two options: (1) sell to another apartment operator (often a REIT), or (2) convert the project to condominium ownership and sell the units to the public. Obviously, the first option is cleaner and easier, but if rising interest rates cause cap rates to rise, apartment developers may find selling piecemeal to the public is a better liquidation strategy.
In any case, the number of high-density housing units in Orange County is remarkable. Nearly half of the new supply will be over 30 units per acre, which means podium construction.
As rents break records, apartment vacancy rates stay low, and millennials delay homeownership, buying houses to rent appeals to investors large and small. But the foreclosures of the Great Recession have been receding for years, and bargains can be hard to come by in Orange County, where the median home price was $640,000 in September.
That’s led many local buyers to set their sights on less pricey property in the Inland Empire and sometimes other states. …
In Southern California, rents hit all-time highs. Orange County rents were the ninth highest among the top 79 U.S. cities.
The average asking rent for an Orange County apartment climbed to $1,781 a month, following 61/2 years of steady hikes, according to Reis. In the past 4 1/2 years, rents shot up 14.3 percent, or $223 a month. …
Meanwhile, homeownership has been dropping, and millennials are expected to rent for longer than their parents did.
Combating the chronic shortage of available housing in California requires building more places to live. It matters little if these new housing units are small apartments or large mansions, but with a dwindling supply of land, high-density housing more efficiently uses the available resource. As developers build more, all segments of the housing market become more affordable to everyone in California.
When the housing market went bust, single-family residential home construction declined 90% or more, and multi-family slowed as well. However, Californians didn’t stop having babies, so the need for housing continued to increase. The collapse of the ownership market spawned a resurgence of the multi-family market, and for the last eight years, developers have been building large numbers of apartments.
Building apartments is the best way of lowering housing costs because apartment development provides the largest number of units in the quickest time while using the smallest parcels of land. While the housing bust and the market’s response to it was not the implementation of a carefully crafted policy designed to reduce housing costs, the results are the same.
Despite the huge disruptions caused by the housing bust, the housing market still functions, and builders and developers provide the right products for the market today.