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Dealing With the Downturn : Housing: In response to the sales slowdown, many realtors, builders and lenders are downsizing their operations.

December 02, 1990|DAVID W. MYERS | TIMES STAFF WRITER

Just last month, the Irvine Co.--which owns one-sixth of Orange County--said it would lay off 11% of its work force in preparation for a lengthy economic downturn. The size of the layoffs was tempered because the company dumped 1,000 workers from its payroll a few years ago.

Not surprisingly, builders are postponing or even canceling new projects. About 174,000 homes are expected to be built in the state this year, down 37% from last year's production levels.

Housing starts across the nation plunged 6% in October, and analysts blamed it primarily on weakness in the California market. It was the ninth straight monthly drop and the most sustained decline since the government began tracking new construction 31 years ago.

Another 5% decline is forecast for the state next year, which would make it the worst year for housing since the 1981-82 recession.

The recent slowdown, coupled with next year's cuts, are expect to cost another 65,000 construction jobs in the state.

Some of those thrown out of work are having a tough time landing another job; competition is fierce.

"We ran an advertisement for a business consultant recently, and we got 450 applicants," said Eric Brown of the Meyers Group, an Encino-based real estate consulting company.

"We even had laid-off Harvard grads applying for the job. It's a lousy time to be out of work in this business."

The weak job market has had a surprising effect on USC's Lusk Center for Real Estate Development, one of the few college programs in the nation that teach people how to become developers.

"We thought that enrollment this year would be on the low side because of the industry downturn," said Richard Peiser, the program's director. "But instead, we've got about half again the number of students that we usually have.

"I guess a lot of people in the business figured that, with the market slowing down, they might as well take a year off and learn the details of the development business. That way, they'll be able to jump back in when the market turns around in a year or so."

Builders' woes are buyers' bounty.

Developers are offering everything from huge cash discounts to luxury autos to anyone willing to buy a new home in their projects.

Presley Homes of Southern California, for example, recently offered a new Mercedes 420SEL--valued at about $60,000--to anyone who would buy a home in its Las Posas North development in Oxnard, where prices start at a relatively modest $333,000.

The soft resale market has given rise to another marketing gimmick: Some builders are willing to purchase people's current homes to induce a sale at their own new tract.

For example, builder Whittier Isles Ltd. is running what it calls an "Instant Home Exchange Program" at its new community in Whittier. "If you agree to buy one of our houses, we'll buy yours for 100% of its appraised value," explained Beverly Smith, who runs the development's sales office.

But such innovative ideas don't always work in this type of sluggish market.

In the Trade Mart program, for example, if a builder had a customer who couldn't sell his current home, Trade Mart would guarantee to either sell the property through Coldwell Banker or buy the house itself. Builders paid the company a fee to join the program.

Unfortunately, Trade Mart started up just as the market was topping out. It had to buy all the homes that Coldwell Banker couldn't sell and finally ran out of cash and suspended operations a few months ago.

Despite such novel ideas, many builders still can't move their standing inventory. And the carrying costs can run as high as $75 a day for each home they have empty.

More and more developers have begun to auction their houses to the highest bidders.

"We'll probably triple our business this year," said Leslie Manabe, a spokeswoman for the Santa Monica-based auction house of Kennedy-Wilson.

"It has always been expensive for builders to pay all their marketing and carrying costs, and the slowdown has made it a lot worse," she said.

"With an auction, they can get all these homes off their books in a single day instead of waiting several months for the project to sell out."

At some recent Southland auctions, homes have sold for 90% or even more of the builder's last asking price. That doesn't sound like much of a discount.

But builders often slash their asking prices once, twice or even three times before going the auction route. By the time a home is sold on auction day, it could be more than 30% below what the developer had originally expected to get for the home.

Lenders

Virtually all lenders are feeling the effects of the real estate slump.

On a single day recently, Great Western and Citicorp reported sharp declines in their quarterly earnings and First Interstate said it was setting aside $68 million to cover possible losses on loans it has made in the state.

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