Southern California builders are cutting prices to move glut of unsold homes
Zillow found price cuts on 25.9% of new homes in Los Angeles and Orange counties; 28% in Riverside and San Bernardino counties.
Faced with the largest inventory of unsold finished homes in six years, Southern California’s homebuilders have resorted to price cutting.
According to real estate watcher Zillow, 25.9 percent of new homes on the market in Los Angeles and Orange counties in the fourth quarter had price cuts — No. 17 of 34 major markets studied nationally. In 2018’s first quarter, 19.5 percent of homes were discounted. In Riverside and San Bernardino counties, 28 percent of new homes had price cuts — No. 11 nationally. In 2018’s first quarter, 27.2 percent of new homes had price cuts.
Builders typically cut selling prices as a last resort, preferring to lure customers in slow times with concessions on everything from mortgage terms to home upgrades. But this isn’t another Southern California real estate quirk — it’s a nationwide trend as 25.1 percent of new homes had price cuts at year’s end up from 19.2 percent of new homes at the start of 2018.
New homes are a small slice of the market — roughly 1-of-9 homes sold regionally — and a pricey one at that. But it’s a must-watch niche because builders — unlike homeowners — must sell their homes and are often market leaders in pricing, up or down.
This local recent bout of discounting isn’t surprising considering more aggressive homebuilding was met with buyer resistance last year. For example, housing tracker CoreLogic found 1,695 new homes sold in November in the region’s four counties — down 4 percent in a year.
Everything from huge uncertainty on broad domestic issues — the mid-term elections, higher mortgage rates, fewer foreign buyers and investors — have combined to cool house hunter demand. Perhaps builders were smarter about pricing as sales of existing homes dropped far more in November — off 14 percent from a year earlier.
Still, new home projects are stuck with plenty of unsold homes to move. Housing tracker MetroStudy found at the end of the third quarter, 3,401 new homes were finished but unsold in our four-county region. That’s up 428 homes in 12 months, or 14 percent, and was the highest inventory level since 2012’s second quarter.
And builders must compete with a swollen supply of existing homes, too. According to listings watcher ReportsOnHousing, 34,027 residences were on the market in the four Southern California counties as of Jan. 10 — up 10,313 listings or 43 percent in a year.
As a result of the sluggish demand, Southern California builders made some of the deepest price cuts seen nationwide.
L.A.-O.C. reductions ran 8.5 percent — tied with San Francisco for tops among major metros — on residences with a $2 million median price. That strongly suggests local builders were too optimistic about sales estimates on higher-end housing. In 2018’s first quarter, cuts averaged 5.9 percent on residence with a $2,348,000 median price.
Inland Empire reductions ran 2.2 percent — No. 8 among major metros — on residences with a $451,500 median price. In 2018’s first quarter, cuts were a mere 0.8 percent on residence with a $443,300 median price.
Again, this is a national pattern. U.S. builders cut prices 2.6 percent on residences with a $389,900 median price vs. 4.8 percent discounts on a $375,000 median price at 2018’s start.
Price cuts don’t make homebuilders happy.
Industrywide angst shows up in the National Association of Home Builders confidence index, which started 2019 with a 58 reading. While on a 0-to-100 scale anything above 50 is seen as optimistic, that most-recent reading was down from 72 a year earlier and 67 two years ago. Confidence was down but higher in Western states, where the regional index started 2019 at 70 vs. 83 a year earlier and 75 two years ago.
The bottom line is that skittish builders will likely prune building plans as 2019 ramps up. That could help cool the red-hot construction industry, a potential drag on the overall economy. It also will disappoint folks hoping for a long-running building boom to boost housing supply and ease cost-of-living burdens.