There’s not much the city can do to speed up the construction of
more than 800 houses it permitted since 2007 through its
competitive growth control system.
There’s not much the city can do to speed up the construction of more than 800 houses it permitted since 2007 through its competitive growth control system.
The No. 1 reason the homes remain unbuilt is the economy – a condition that remains also beyond the control of the developers and owners who proposed them.
While city staff and council members have shown frustration in recent weeks, as builders have appeared at public hearings to ask for repeated extensions of their original deadlines to build the homes, they now acknowledge they will just have to ride out the storm until the market improves or they can clean up the city’s complicated growth control system.
The consensus reached at a special workshop with the planning commission held last week to discuss possible updates or revisions to the lengthy, burdensome process was to just continue enforcing the current ordinance, for now.
“I think the core issue we have to figure out is which (projects) are viable,” Councilman Larry Carr said. “I believe there are a substantial number of projects out there that are just not economically feasible today. The whole setting of development today is different than it was when a lot of these projects were proposed.”
At a council meeting in May, the developers of 13 subdivisions comprising nearly 800 unbuilt home sites asked the council for deadline extensions so they would not lose the allocations they previously gained. The council granted a one-year extension to begin construction for most of them.
If allowed to expire, allocations could go back up for competition, or entire projects could be eliminated or renegotiated.
Most of those 800 or so allocations were granted when the market was booming, until 2009, as Carr explained. Since then, a nationwide housing slump has occurred, and almost all the builders now say they are unable to gain the financing they need to start construction, which was abundant at the peak of the market.
“I think the council has been considerate of developers, recognizing the market and economy is certainly different than when they applied for them,” Councilman Gordon Siebert said.
The city’s ordinance, known as the residential development control system, is unlike most other cities’ efforts to control growth.
The complicated ordinance sets a 2020 population cap of 48,000 beyond which Morgan Hill officials cannot grow, according to a measure first passed by voters in 1977. As a result, the city permits only a limited number of houses to be built. Permitting is competitive, and the ordinance employs a points system for applicants who “win” allocations based on their projects’ contribution to the overall benefit of the community.
For example, community parks, street and water system improvements, energy efficient designs and affordable homes can add points to builder’s proposal when submitting permit applications.
Dividend Homes president Dick Oliver has competed for home allocations in Morgan Hill since the first rendition of the growth ordinance in 1989. Dividend Homes is currently developing the Mission Ranch and Alicante Estates subdivisions in northeast Morgan Hill. Those are mostly higher-end homes, and Dividend has struggled financially just as much as any local builder.
“Through 2008 the competition was very hotly contested,” Oliver said. “In 2008, 2009, when the market collapsed the banks weren’t loaning money to build, and people weren’t buying houses. Nobody could build any houses.”
According to zillow.net, Morgan Hill’s median home value as of May was $504,000, about a 35 percent decline in value from the May 2007 median value of $786,000.
Many builders consider the city’s complex growth policy annoying and expensive, with lists of fees and mounds of paperwork required for permits, Oliver added. Historically, that has deterred public national construction companies from entering the Morgan Hill market, instead opting for less regulated markets in the Fresno and Sacramento areas, for example.
However, some of those builders have returned to Morgan Hill in recent months. With plenty of cash in their pockets, and local land for sale to which housing allocations are already attached, they don’t have to wait for bank loans, explained longtime Real Estate Broker John Telfer.
D.R. Horton and KB Homes are two such companies that have recently purchased entire projects in Morgan Hill that are already approved under the growth competition but are only in the beginning stages of construction.
Those are examples of the projects that were not economically feasible under their previous owners, Telfer added.
“In the good old days, especially in Morgan Hill, we never had the larger publicly traded companies,” Telfer said. “Most of the time (the bigger companies) were looking for a huge number of units all at once. In Morgan Hill they couldn’t do that because of growth control. In the last few years, the larger companies have redone their model, to maybe locate in areas that have some barriers to entry” such as Morgan Hill.
The benefit of the city’s ordinance, then, is it avoids over-construction such as was seen in places like Las Vegas, Nev., where hundreds of brand new, yet unoccupied homes scatter the landscape, Telfer said.
The impact of Morgan Hill’s construction delays to the general community is mostly apparent to the developers who gained the permits and have lost money as they wait for financing.
Local demand for new homes remains low so there’s no threat of a shortage, builders say.
In addition to granting the deadline extensions, the city has allowed builders to opt out of their affordable housing requirements in exchange for fees. More expensive market rate homes are more profitable to developers than affordable ones.
Siebert noted in the unlikely scenario that if all the builders were suddenly ready to begin building 800 homes at the same time, they are already permitted to do so and that would be difficult to the city.
“The school district would have to gear up, PG&E would have to extend their facilities, wastewater would have to be enhanced,” Siebert said. “Orderly growth, which the RDCS was designed for, might be enhanced if there were not such a large backlog.”
Most builders agree the market is fragile, with no signs indicating an impending return to stability. Morgan Hill, in part because of its growth control efforts, could see a “faster recovery” than surrounding communities, Telfer said.
Oliver thinks to alleviate some of the red tape and delays, a citizens’ committee should be formed to draft a “streamlined” growth or building ordinance, which could be presented to the voters on a future ballot.
Mayor Steve Tate said the city’s general plan committee will consider significant revisions and updates to the RDCS the next time it gets together. But that process is long and costly, and while city officials hope to start a general plan update within the next couple of years they aren’t sure they will have the funds to do so.
The mayor said a benefit to allowing some of the allocations to expire is they are removed from the broke developers’ hands, and could be taken over by one of the cash-rich mega-builders that has entered the Morgan Hill market recently.
“We have this backlog of homes that aren’t being built, and we have some people that could come in and build these homes now,” Tate said. “That’s a problem with the growth control ordinance.”
