A combination of favorable market conditions for consumers and city development policies are contributing to a resurgence in the real estate and construction industries in Morgan Hill.
Building permits issued for new homes in Morgan Hill already this year have more than doubled those issued for the entirety of 2011, and the number of “active” homes on the market – those that are for sale but have not received an acceptable offer – in Santa Clara County has been cut in half in the last year.
As of July 20, there are currently 112 new homes under construction in Morgan Hill, according to a city staff report. With a key deadline for builders to opt out of their affordable housing commitments approaching, that number could rise by the end of the summer.
Realtor Rob Malech, who sells homes throughout the South County area, said sellers are “starting to pick up multiple offers on houses,” and conditions are ripe for a coming jump in prices.
“I think we’re in a time period where it’s the last chance for people to get a super deal with super low interest rates before the prices and rates start going up,” Malech said. “If prices go up, we’re looking at a 10- to 20-year” upward cycle.
Interest rates for borrowing buyers are in the “4 percent range,” a rate that cannot get any lower, Malech said. And developers, lenders, consumers and builders have “learned their lessons” from the real estate crash that started in 2008 and has seen home values decline more than 40 percent since then.
“Sellers are now in control,” Malech added. “The next thing that will happen is supply and demand are going to start raising the prices. As the prices go up, more and more people are selling.”
But another factor unique to Morgan Hill is at play. Developers with approved housing allotments have until Sept. 30 to start construction on projects for which they want to opt out of their affordable housing requirements.
In 2010, in response to the struggling market that made it increasingly difficult for builders to acquire financing, the city agreed to allow developers to pay a fee of $150,000 per affordable housing unit they chose not to construct, and instead replace with a market-rate unit. City staff and developers determined it would be more lucrative for builders to pay the fee than to attempt to sell the lower-priced homes, for which the market was even worse than that of higher-priced homes.
In recent months, that means builders with allocations have been scrambling to get started with construction before the Sept. 30 deadline, assistant city manager Leslie Little said.
The surge in new home building could continue until June 2014, when developers can still opt out of half their affordable home requirements for a $75,000-per-unit fee.
The money from those fees goes into the city’s housing fund, which is used for programs such as down payment assistance loans, construction loans for affordable homes and other forms of assistance, Little said.
More buyers are likely to be looking at those homes than last year, too, but maybe not for long if interest rates go up, according to Pamala Meador of Intero Real Estate in Morgan Hill. If another downturn occurs, for example, the current uptick in sales could be short-lived.
“If interest rates go up, that could put downward pressure on prices,” Meador said. “I don’t think it’s on the firm foundation I’d like to see it on.”
So far this year in Morgan Hill more than 200 homes and 28 condominiums have been sold, and the Gilroy market has seen similar numbers.
In the last year, the number of “active” homes on the market in Santa Clara County has plummeted from about 2,600 to 1,300, according to Malech, who cited data from a local listing service used by real estate people. That drop suggests homes are selling faster and in more volume.
In Morgan Hill, there are currently 111 active homes on the market and 107 “pending” homes – those that have a buyer awaiting closing or approval, Malech said.
This low inventory of homes for sale is keeping the market strong for now, Meador added.
“There’s a lot of buyers that want to buy in our wonderful community, and there’s not a lot to sell,” Meador said. She added that the last “four or five homes” she has sold have seen multiple offers. And many of the buyers are “strong buyers” who are able to put up to 50 percent down, or even pay all cash.
“People are seeing that the time to buy is now,” she said.
The construction of new homes, many of which are built, brokered and sold by a single company these days, is also a considerable factor in the prices. D.R. Horton, a national corporation that has a number of projects under construction in South County, “just raised their prices on us by 10 grand because there’s so much activity,” Malech said.
Companies like D.R. Horton and KBHomes – which is building the Milano condominium community on Condit Road in Morgan Hill – have entered the local market in the last two years with deep pockets. The companies have swiped up projects previously planned by local or regional developers who lost the properties to foreclosure or have been unable to afford construction costs.
The market is also still driven largely by “short sales” of bank-owned or underwater homes, but that inventory is drying up as the market improves, Malech said.
So far in Morgan Hill, 126 building permits for new homes have been issued this year, compared to only 57 in 2011, according to Little.
In June, 125 total building permits – including additions, new roofs, remodels and other improvements – were issued. In June 2011, 108 building permits were issued.
The estimated value of these projects has nearly tripled, suggesting more of the approvals are for new homes. In June 2012, the value of permitted projects was about $18.7 million, and in the same month last year that value was about $6.7 million.
