Scott Layman works on the framing of a new home under construction at the Country Meadow subdivision, by Tuxhorn Homes, in Santa Rosa on Thursday, March 13, 2014. (Christopher Chung/ The Press Democrat)

Modest gains for Sonoma County home builders

ROBERT DIGITALE
THE PRESS DEMOCRAT

Sonoma County's home building industry looks like it's finally shaking off the hangover of the past six years.

Local contractors pulled significantly more new home permits in 2013, and at least two major subdivisions in Rohnert Park are expected to start taking shape this year.

However, the near-term outlook remains lackluster for construction of single-family homes, and many predict that building activity will remain subdued when compared to the pace of the past quarter-century. Builders foresee fewer construction jobs and a limited supply of new homes for years to come.

Last year, county builders obtained permits to construct 1,025 housing units, the most since 2007, according to the California Homebuilding Foundation in Sacramento. In comparison, 597 permits were issued in 2012.

However, more than 70 percent of last year's new units were in multi-family projects, primarily two apartment complexes in Rohnert Park and Santa Rosa. Only 293 permits were issued for single-family homes, an increase of 9 percent from 2012.

"It's definitely better than it's been in the past six or seven years," said Keith Woods, chief executive officer at the North Coast Builders Exchange, a Santa Rosa trade group. "But we're not back to anywhere near where we were a decade ago."

Santa Rosa officials also reported an uptick in building activity. The number of permits issued by the city doubled to 488 new units, with the increase due entirely to new multi-family projects like apartments and condominiums.

In Mendocino County, the total number of permits for new single-family houses rose by 22 units to 92, according to the homebuilding foundation. There have been no multi-family housing complexes built there in the past two years.

In Lake County, the number of single-family home permits increased by 17 units to 50. However, no multi-family units were built there last year, compared to 50 in 2012.

Over the past 25 years, Sonoma County and its cities have issued an average of 2,000 new home permits a year. The vast majority of the permits were for single-family homes.

But the industry has seen nothing if not booms and busts. In 1989, builders took out 4,500 permits as the county's average home price jumped 170 percent in the decade to $189,000.

Ten years later, builders would obtain just 430 permits in 2009 amid a historic housing market crash. That February, the county's median price fell to a low of $305,000 after reaching a record high of $619,000 in August 2005.

Home prices since have rebounded, and the county median price last month stood at $449,825.

But the county still has about 6,000 fewer construction workers compared to 2007. Last summer, construction jobs peaked in August and September at 9,200, according to the state Employment Development Department.

Over the past quarter-century, two themes have repeatedly surfaced in discussions about the county's housing industry.

The first involves a worry about too much growth, a fear that new subdivisions are outstripping the capacity of county roads, utilities and other municipal services. Such worries over the years led to voter-approved urban growth boundaries that confine housing projects within cities.

But the second theme involves concerns about how growth restrictions and increasing regulations are driving up the cost of housing and making homes too expensive for the next generation.

Builders note the county has one of the tightest apartment vacancy rates in the nation. They also maintain that the demand for housing is likely to intensify as employment increases in the coming years.

Rising home prices, job growth and the decline in home foreclosures all are expected to help pave the way for more subdivisions. And builders say the place with the most potential for new homes is Rohnert Park.

The city had a reputation for rapid growth in the 1970s and 1980s. But it hasn't issued a building permit for a new single-family home since 1998, said Marilyn Ponton, the city's interim development services director.

However, Ponton pointed to two areas in the city where construction is expected to get underway this year.

One is the University District area near Sonoma State University's Weill Hall, where the city has approved about 1,650 homes. She expects one of the builders to begin grading there this year, with the first homes for sale possibly in 2015.

Construction also is slated to come in the city's southeast section, where Redwood Equities has approval for 475 homes.

"Things are happening here," Ponton said.

Ken Blackman, a spokesman for Redwood Equities principals Dennis Hunter and James Ratto, said the company plans late this spring to start building 10 to 15 houses near Valley House Drive and Bodway Parkway and to complete the units this fall.

Blackman, a former Santa Rosa city manager, said a half-dozen potential buyers already have contacted him and expressed great interest in purchasing a home.

"Those are very favorable signs," he said.

Even so, he and others acknowledged that the construction industry faces strong headwinds. Blackman pointed to one in particular that has slowed the housing rebound.

"Really, the answer is money ... the drying up of money for new construction," he said.

Others agreed, noting that banks took huge losses on construction and real estate loans during the Great Recession. Now, lenders are requiring builders to use more of their own money on projects and to demonstrate that their developments can overcome any environmental, regulatory and economic hurdles.

Construction companies must give lenders "a battle plan of how they're going to sell those homes," said Robert Eyler, director of Sonoma State University's Center for Regional Economic Analysis.

Constraints also come from the expense of meeting regulatory demands.

At a small subdivision off Hearn Avenue in west Santa Rosa, builder Tux Tuxhorn listed the various inspections his homes receive, including for soil, structural, building, energy, recycling and stormwater runoff. His workers, meanwhile, all receive training on how to identify and avoid disturbing the tiger salamander, a federally threatened species.

Today's homes have new energy and insulation standards and contain fire sprinklers, humidifier-controlled bathroom fans and irrigation systems with their own water meters and rain shut-off monitoring devices.

The inspections, training and new devices all may be worthwhile, Tuxhorn acknowledged. "They just don't come free."

Those costs pale in comparison to the $756,000 that a previous owner paid to mitigate the loss of tiger salamander habit at the 24-unit subdivision. That works out to more than $30,000 per home, said Tuxhorn, who bought 14 lots at the Country Meadow subdivision from a lender after a previous builder lost the property.

In the past five years, most of the single-family homes built in Sonoma County have been located in developments taken back by banks. Tuxhorn and others said home prices still need to rise more before builders can justify buying market-rate lots and constructing homes.

"I'm really concerned that market values have not gotten back to replacement costs yet," Tuxhorn said.

Even when prices rise, most predict a subdued pace for single-family home construction. Many agreed with an estimate that within a few years county builders could construct an average of 500 to 600 houses annually for a decade. That would be significantly less than half the historical average.

The county will continue to have a small homebuilding industry, "but it's not going to be as substantial as it was," said Chris Peterson, a former Santa Rosa builder who moved his construction operation to Austin, Texas two years ago.

Peterson, an owner in Rivendale] Homes Texas, said builders with raw land around Austin can get the needed regulatory approvals in 18 months, compared to upwards of five years in Sonoma County. Builders can obtain permit approvals in Austin in two weeks for a cost of $6,000 a unit, compared to four months and $60,000 a unit here.

A 2,500-square-foot home in Austin sells for about $200,000, he said.

"The people have more paycheck left at the end of the month," Peterson said. In Sonoma County, "people have no paycheck left at the end of the month because rent and housing costs are so high."

A more optimistic outlook on future construction in Sonoma County came from economist Christopher Thornberg, founding partner of Beacon Economics in Los Angeles. He acknowledged that the next few years will be relatively slow for California builders. But for the longer term, he said, "I think it's going to be a little more positive than people think."

Thornberg, who speaks yearly at an economic forum in Santa Rosa, dismissed the idea that home construction is being held back by a lack of buildable land. "It's NIMBYs," he said, a reference to existing residents who say to new construction, "Not in my backyard."

He also suggested that California needs to accommodate the next generation of workers and homeowners.

"They're coming," Thornberg said. "We better make room for them. Period."

Builders expressed sympathy for Thornberg's viewpoint. But they said the county has a very limited number of residential lots with regulatory approvals, and some of those need to be redesigned for today's market.

Builders also will be cautious about developing raw land because it takes so much time to complete the necessary studies and secure the required government approvals. Randy Waller, broker with W Real Estate in Santa Rosa, said such work involves not only the risk of failing to win the needed permits, but also of obtaining the approvals just at the time a new recession hits.

"Nobody wants to tie up money for that long," Waller said, "especially with the unknown of what the market's going to be in four to five years."

(You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com.)

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