A Look at 1986, and the Climate for ’87 : Housing Construction

Lower mortgage interest rates and strong buyer demand spurred a housing boom in Orange County in 1986 without the runaway housing prices that accompanied the real estate frenzy of the late 1970s.

“The year clearly represents the rebound of the residential real estate market” from the doldrums of the 1982 recession, said Ken Agid, a principal in the Irvine real estate marketing firm The Marketing Department.

While lower-priced homes began selling well early in the year, Agid said, the full spectrum of housing took fire in March after mortgage interest rates fell to 10% and below.

Most analysts are predicting that interest rates won’t rise significantly and that the housing industry will stay active at least through 1987 as a result.

In 1986, building permits issued for residential housing increased by 10.9% to 22,600 units from 20,383 the previous year.

That made 1986 the busiest year for issuing home building permits in Orange County since 1977, according to Ben Bartolotto, director of the Construction Industry Research Board.

The housing growth, Bartolotto said, mostly consisted of attached housing, including apartments and condominiums. The number of new single-family homes built in the county actually declined 4% in 1986, he said, while the number of new multifamily homes built increased almost 23%.

Affordability was the key to the 1986 housing revival, created both by lower-cost financing and smaller, attached for-sale houses and apartments.

As of October, 31% of the households in Orange County could afford to buy the county’s median-priced resale home selling for $152,857, according to the California Assn. of Realtors. By contrast, in October of 1985 only 27% of the county’s households could afford to buy the median-priced house at $139,261.

One of the largest projects to open during the year was the long-awaited Santa Margarita, a 5,000-acre community east of Mission Viejo. The master-planned community is geared to providing housing within the means of retirees and first-time home buyers. Ten builders initially offered houses ranging in price from $56,000 to $140,000--and sold 400 homes during the first weekend of sales.

Although waiting lists and drawings returned to the housing market in 1986, builders did not try to cash in on buyer demand by sharply raising prices as they did in the late 1970s, said Roland Osgood, president of the Irvine Co.’s land development group.

“Everyone from subcontractors to lenders are being more cautious and the consumer is benefiting,” Osgood said.

In turn, Osgood said, consumers are not buying houses on speculation that they can sell them soon to reap big profits. In large part, he said, the kind of speculative fever that was rampant in the late 1970s is being kept in check by a low inflation rate.

Rentals were also a major part of the housing picture in 1986. Low-interest financing from tax-free revenue bonds generated a surge of apartment construction in 1986 that pushed up apartment vacancies and prompted some landlords to offer rent discounts and other perks such as color televisions and trips to Hawaii to attract tenants.

However, a new ceiling on revenue bond financing and the elimination of other incentives under the new federal tax legislation are expected to halt much of the apartment construction and lead to substantial rent increases toward the end of 1987.

The resale housing market also was extremely brisk in Orange County in 1986. Robert Lee Thomas, president of Century 21 of the Pacific Inc., a franchiser of Century 21 residential real estate brokerages, said 1986 was “the best year ever” for Century 21’s 73 offices in Orange County--which did 25% more business than in 1985.

Although 1986 was a great year for most developers, it brought a crisis to the Stein-Brief Group’s giant Monarch Beach development in Laguna Niguel. On April 17, the company’s largest creditor filed notices of default on a $49-million loan, secured by about 400 remaining undeveloped acres in the residential and resort project.

After intense negotiations, Stein-Brief saved the project from foreclosure with a complex new financing arrangement in which it forfeited 170 acres to Beverly Hills Savings and Loan.