Prices at Messina at La Costa Ridge by Shea Homes start at $1.1 million. Square footages range from 4,374 to 4,873 with three and a half to five bedrooms and five and a half baths. They have three- and four-car garages.

Last year was a tough one for San Diego’s Top 25 new housing sellers, when as a group they accounted for 5,932 of the 9,477 homes sold in the county, down 3,413 escrows, or 36.5 percent, from the 9,345 homes they moved a year earlier (when total new home sales were 13,517).

Builders were not thrilled with the year but the results left buyers with deals to be found, particularly in the fourth quarter and the start of this year. Adjustments by builders, including slowing new construction, could make those deals short-lived.

Condominium conversions influenced the 2006 market. Escrow data collected by MarketPointe Realty Advisors reveals that conversion of apartments into for-sale houses last year accounted for 1,817 units, or 40 percent, of the escrows opened by the Top 25. With converters responsible for nearly half the new product on the market in 2006, that figure hardly surprises Russ Valone, president of MarketPointe Realty. In sheer numbers, conversion sales are on the decline, with the 3,745 recorded in 2006 down 21.7 percent from the 4,780 a year earlier. But with escrows by the Top 25 down, they still represent a larger percentage (40 percent) of total sales than the 36 percent they did in 2005.

The five top-selling builders on the list remain primarily new construction developers, with No. 5 being a one-year wonder, 5th Rock, which sold 420 hotel condominiums as part of the Hard Rock Hotel under construction in the Gaslamp Quarter. “We count them because these condo hotels do compete in the San Diego marketplace,” Valone says. “Because San Diego is a destination and because we have a significant number of second-home buyers in the San Diego area, condo/hotels compete for that second-home buyer. Especially the second-home buyer who is an occasional user. This is a new addition, a new kind of builder in our marketplace.”

Another builder unlikely to make a repeat appearance on next year’s list is Renovation Management, which came in at No. 22 with 106 escrows. The firm now is working a 384-condo project in Las Vegas.

The housing market begins this year with stability setting in and less hesitancy among buyers and sellers. “You might see some more investors step in because we’ve been seeing some significant price point readjustment relative to condo conversions,” Valone says. “That may bring investors back in that marketplace. With prices in that sector declining, all of a sudden they may become viable investment opportunities again.”

A Year For Buyers

The Briars, a neighborhood in Lennar’s Eureka Springs development, offers three home styles including this 3,198-square-foot model with four bedroom and three baths, starting in the mid-$500,000s.

The No. 1 builder, Lennar Homes, is the list’s only new home builder with conversion escrows (65). Even minus the conversions, Lennar sold the greatest number of new homes, 546. The 611 total is 113 escrows (15.6 percent) short of the 724 escrows Lennar recorded for 2005 in earning a No. 2 ranking. “2006 was a challenging year for most builders in town, including Lennar,” says Mike Levesque, regional vice president of Lennar. “The year was marked by slower sales and very little pricing stability in our markets, which were the primary business challenges for us. That being said, it was also one of the best times to buy a home in San Diego in recent years, as the supply and demand balance moved to the benefit of San Diego buyers.”

An 18-year veteran of his industry, Levesque has ridden the housing roller coaster in various seats. “The last time we went into a deep cycle, I was in a different role without the benefit of the perspective I have in running a large real estate operation,” Levesque says. “So I don’t really find similarities to previous years in my career. What I do remember about the last cycle though, is that changes in the market tended to move a lot more slowly than they did in 2006.”

Will 2007 be different? “Yes,” Levesque says. “I think the 2007 market will still have its challenges, but there are many indications that this market is stabilizing. Inventories of new homes, as well as resale homes, are declining, which is important to the overall health of the market. This, combined with a continuing low mortgage rate environment, should provide buyers in our market with great opportunities to find the home of their dreams in the coming year.”

Buyers have many options today, “which is one of the great things about buying a home in San Diego,” Levesque says. “We have a tremendous diversity of community offerings, including everything from luxury high-end homes to Downtown high-rise condominiums. And while I do believe the volume of homes and new communities may moderate in our future, I think you will continue to be able to find a good selection of homes to choose from in our market. The thing our buyers today can’t be certain of is whether there will be a better time than this moment to buy a home in San Diego.”

Lennar’s plans for this year include opening Sky Ranch in Santee, The Lakes in Rancho Santa Fe and a new community in Chula Vista. “We will continue our focus on providing the single best buying and homeownership experience in our market and we have some new service initiatives in place to facilitate this in the coming year,” Levesque says. Even in a slower market, the company plans on being very active in acquisitions. “We will be pursuing both entitled and unentitled property throughout our market in an effort to provide both single-

family and multifamily communities from Lennar in the future,” he says. “2007 should be a great year.”

Informed Decisions

Paul Barnes of Shea Homes says 2007 home buyers are not looking to make investments as much as improve their standards of living, perhaps to gain more space or enjoy a new community.

Sitting comfortably at No. 3 is Shea Homes with 467 escrows, up from last year’s 437, which landed the company at No. 8. “2006 was a year of transition,” says Paul Barnes, Shea’s division president. “All the figures and facts are pretty accurate. It is what it is. But it is still a healthy industry. Locally, and nationally, home builders have had to adjust their business plans and in many cases write down inventory as a result of the change. I think those that had healthy businesses will continue to prosper, certainly not to the degree they had, but they will continue business in San Diego.” One difference last year, Barnes notes, is that a handful of builders left the market.

Personal rather than investment reasons are driving buyers in today’s market, says Barnes, “which is healthy. They want a bigger house. They have a growing family and they are sitting there and there is just not the space. They desire to live in a certain area or in a
certain lifestyle.”

Market Dissection

San Diego offers four main product types: traditional single-family detached, conventional garage on grade condo, high-rise and conversion. Barnes says the first two products don’t have much inventory and predicts a shortage of supply beginning by the end of the first quarter. By April or May, prices will begin to adjust for the new market. “People are not building a lot of homes right now,” he says. “There is not that much inventory even if they wanted to and there are a lot of impediments to future opportunities and future inventory.”

The time is now for buyers who want to negotiate or take advantage of the boom in upgrades and incentives being offered by new home builders. “When the inventory is gone there won’t be the ability for the buyer to come in and negotiate,” Barnes says. “The land is too valuable for any home builder, including ourselves, to get in front of ourselves with inventory that is on a spec basis.” Shea will hardly hibernate, though, with plans this year to open seven new communities from Carlsbad to South County.

Tough, But Hardly 1992-93

As 2007 progresses, builders will slow their rush to compete on incentives and the market will even out, predicts Brookfield Homes’ Steve Doyle. (photo/alandeckerphoto.com)

Steve Doyle, president of Brookfield Homes, describes 2006 as tough. At No. 14, Brookfield closed 182 escrows. Doyle is quick to point out that these numbers include only San Diego. The company also builds in Riverside. “It is one of those situations where we float back and forth between the two counties in production numbers,” Doyle says. “Overall the number is less than average, usually it’s in the 400 range, but the market was slower. I think, in looking back, it’s not a year we should have been surprised about or caught short on. In July 2005, we started to see a major shift in absorption, buyers really started slowing down. When that happens, you come to the end of 2005 and if you don’t have a lot of homes sold, ready to close, you know 2006 is going to be a slow year. But it wasn’t a bad year. It was probably an average year in San Diego. But after the run up we’ve seen in the last four or five years, it felt like a bad year.”

For builders who bought lots in 2004 or 2005, Doyle says the year wasn’t very profitable. “That is not necessarily our situation,” he says. “We do land development and master-planned community development so most of the land we had was six to 10 years old. That gave us a little more flexibility in riding out the pricing challenges of last year.”

Doyle has been president at Brookfield for 11 years and with the company 14. What happened in 2006 was nothing compared to the horrible years of 1992 and 1993, he says. “We didn’t start to see the turnaround from the recession that began in 1990 until 1995 and then it was just a hiccup because 1996 was not a good year,” he recalls. “’97 started the uphill run.” Doyle projects 2007 will be better as the market’s volatility settles. More consistency in pricing, reduced incentives and buyers more comfortable with the market are among his expectations. “We have had a fairly good first six weeks of the year,” he says. “Part of that has been due to weather and part of that has been due to folks getting back to a position of looking around and saying interest rates aren’t going to go up or down significantly.”

Doyle too sees buyers looking for personal, not investment reasons. Some deals will remain. “Some communities have higher numbers of inventory available and those builders are going to be a little quicker to give incentives or adjust pricing,” he says. At the same time, he notes, in most communities the standing inventory is gone and builders won’t start the next phase until about half is pre-sold. “That will help stabilize prices and giveaway incentives,” he says. “There are still some good bargains. The absolute best time to buy was the fourth quarter of last year because builders were trying to desperately get as close to their projected numbers as possible.”

One way builders are wooing new home buyers is by making optional upgrades standard features. Examples include granite counter tops, stainless steel appliances, special plumbing and lighting. “There were folks giving away cars last year,” Doyle says. “That is not happening anymore. I think primary interest right now is flooring and tile work. What we are also seeing is folks using their incentive dollars to buy down their interest rates. Folks just feel a little more comfortable getting rates down under 6 percent.”

Brookfield has five San Diego projects planned this year that include entry-level attached homes starting in the $300,000s to million-dollar luxury homes on large lots. “A lot of us would be very happy if (the market) returned to normalcy,” Doyle says. “The hardest part of last year was opening the Sunday paper to see the competition dropping prices or increasing incentives. You just seemed to be chasing your tail all the time to keep up with the competition. I think if we all can settle down and allow some normalcy to return to the market we all would be happy.”

Sudden Loss Of Investors

‘It definitely is a good time to buy a home right now,’ says Angela Merrill, area vice president for K. Hovnanian.

Things over at K. Hovnanian already are looking up. “We saw the inventory on the market take a toll on the market,” says Angela Merrill, area vice president for K. Hovnanian. “But we think it is leveling out. We’ve seen a lot of sales and renewed energy from buyers over the last few months. Prices have adjusted and the resale inventory has gotten absorbed. So we saw the end of 2006 as pretty strong.” K. Hovnanian ranks No. 19 with 123 new homes, down from No. 17 in 2005 with 287 homes. “2006 was a time of adjustment,” Merrill says. “Every year is really different. We were caught off guard in the building industry because the turn was so sudden. Investors pulling out of the market was so sudden.”

Merrill says much of the standing inventory has been absorbed and builders are getting back on track. “We are now back to an even pace where we’re able to sell our homes when they are in construction or prior to construction,” she says. In the markets where price adjustments have taken place, prices have been stable for the last few months. Merrill doesn’t foresee them increasing sharply nor does she see them going down much more. “We are seeing some stability in the market,” she says. “Which is good for this market. It definitely is a good time to buy a home right now. You’ve still got a good selection on the market, people have burned through some of their inventory, but nobody will be aggressively increasing the price of homes for a while.”

As for what buyers seek? “It all comes back to value,” Merrill says. “The design of the house, the size of the yard and the proximity to amenities are all taken into account and weighed heavily against the competitor.”

K. Hovnanian’s sales were spread across the county from North County to Downtown. Its 2007 sales will include projects from Fallbrook to Chula Vista. Future plans are to continue building in the area. “We would like to buy more land,” Merrill says. “We continue to look for all opportunities in the single-family market as well as the infill market.”

Exaggerated Rumors

The 2006 escrow numbers were low enough that builders who sold 100 units tied for Nos. 23 and 24 while Bosa Development came in at No. 25 with 99 units. A year earlier it took 150 escrows to crack the list. No one was safe from the slowdown. Last year’s No. 1, Pacifica with 849 escrows, landed out of the Top 25 in 2006 with 87 homes sold.

As new construction slows, supply is dropping. “Not only in the new-home market but in the resale home market,” Valone says. “I find it fascinating; when there is a lot of supply, people are hesitant to buy. When they have the most choice, they are hesitant. One thing we’ve seen happening over ’06 is we cannot see that huge 40 percent decrease in value that some people were talking about. As a matter of fact, we haven’t even seen double digit declines in values. The latest data shows we had a little increase in the aggregate average over the last year.”

Valone predicts a stabilizing market will bring out a few more potential buyers. But, he cautions, “Those people looking for the best value had better start looking now. As inventory is absorbed, they are controlling new starts now much more than in the previous year, they are not going to let inventory levels build. As the supply diminishes, there will be less need to offer incentive. So if your sole purpose to buy is to get the best incentive deal you can get, you better do it now.”

And to those out there thinking about buying, Lennar’s Levesque says, “Our industry is driven by supply and demand. As inventory in the market continues to decline, this should stabilize pricing as the year goes on, which will inevitably lead to prices rising in the future. Who knows where we will be on this subject in the future? If I were a buyer sitting on the fence today, I would definitely consider the coming months as a great time to buy a home in San Diego.”