Single family residential (SFR) starts rose 18% over one year earlier in the six-month phase ending September 2017. Multi-family construction starts also increased, rising 19% from a year ago.

Multi-family construction was down in 2016 but has rebounded slightly in 2017. Demand for multi-family rentals has generally been higher during this residential construction recovery compared to new SFRs. However, buyer-occupant demand for SFRs is gradually increasing as jobs are recovered.

SFR construction turned in a 12% increase in 2016 over 2015. Expect SFR construction to continue to rise by about 10% through much of 2017. But compared to the 150,000 SFR starts achieved in 2005 at the height of the boom, even 2016’s positive performance – resulting in 49,400 SFR starts – is a fraction of what is needed to meet demand.

Multi-family construction reports showed a 4% decrease in 2016 from 2015. However, rental vacancies are low in 2017, meaning multi-family construction will need to rise considerably, and soon. Like SFR construction, multi-family starts are at a fraction of what is needed to keep up with rising demand from California’s growing population. 

Updated November 15, 2017. Original copy posted November, 2012.

Chart 1

This chart illustrates the number of California residential construction starts during bi-annual  periods ending in March and September.

california-construction-chart-sep-2017

 

Chart update 11/15/17

 Six-month period ending Sep 2017 Mar 2016 Sep 2016
SFR Starts 31,200 24,500 26,500
Multi-family Starts 28,800 23,900
24,300

Chart 2

california-annual-construction-2017

Chart update 11/15/17

  2016 2015 2014 2005 peak
SFR Starts
49,400
44,100
38,600
154,700
Multi-family Starts
51,200
53,500
44,300
50,300

*Forecasts are made by first tuesday and are based on current new home sale trends, actual construction starts and current government policies. Detached single family residential construction trends in California:

  • 31,200 SFR starts took place in the six-month period ending November 2017. This is up 18% from the same period one year earlier, amounting to an increase of 4,700 starts.
  • 49,400 SFR starts took place in 2016. This is up 12%, or 5,300 starts, from 2015.
  • The trend in the total number of SFR starts in 2017 is expected to rise about 15% over 2016.
  • For perspective, this cycle’s peak year in SFR starts was 2005 with 155,000 starts. The lowest year was 2009 with 25,000 starts.
  • Final reports issued for new subdivisions by the California Bureau of Real Estate (CalBRE) have remained constant for several years, roughly level during the past 12 months.

Detached SFR forecast:

  • first tuesday‘s forecast for total SFR starts in 2016 is approximately 57,000. This is 15% higher than 2016.
  • SFR starts will begin to rise more noticeably in 2018, once builders have adjusted to the new paradigm of rising interest rates.
  • Subdivision final reports will continue strong as developers continue to sense a return of home buyers is on the horizon.
  • The next peak in SFR starts will likely occur during the boomlet period of 2020-2021.

Multi-family housing construction trends:

  • 28,800 multi-family housing starts took place in the six-month period ending September 2017. This is an increase of 4,500 starts, up 19% from the same period one year earlier. September’s positive performance is a reversal of the negative trend experienced in multi-family starts since mid-2016. 
  • 51,200 multi-family housing starts took place in 2016. This was down 4% from 2015.
  • For perspective, this cycle’s peak year in multi-family housing starts was 2004 with 61,500 starts. The lowest year was 2009 with 11,000 multi-family housing starts.

Multi-family housing forecast:

  • first tuesday‘s forecast for total multi-family housing starts in 2017 is approximately 51,000. This is the same as 2016.
  • Multi-family housing starts started out 2017 at a reduced number, but have slowly increased throughout the year. Therefore, the total number of new multi-family starts will likely be roughly the same as 2016.
  • The next peak year for multi-family housing starts is likely to be 2020.

Statistics related to California housing:

  • 6,943,000 owner-occupied housing units existed in California in 2016, according to the U.S. Census Bureau. This is an increase of 1% over the prior year.
  • California population growth is increasing at a rate of just below 1% per year, having bottomed at the height of the Millennium Boom and trending upward slightly since then.
  • 16.8 million people were employed in California in September 2017. This is about 1.2 million jobs above the pre-recession peak month of December 2007, according to the California Employment Development Department (EDD), yet to catch up with the 1.6 million increase in working-aged population.
  • The trough month in employment was January 2010, with 13,686,400 people employed state-wide.
  • The rental vacancy rate at the end of 2016 was 3.6%.

Construction starts will continue to falter somewhat in 2017, to rise in the following years through 2020 at least. The pace of this rise is dependent on several factors, discussed below.

Related articles: Nobody’s home: California’ residential vacancy rates Golden state population trends

Key factors for builders

How do builders decide when and where to build? Builders analyze existing home sales, end user demand and local employment. Together, an analysis of these and ancillary factors produces a prediction of future construction trends.

End user demand drives sales

End user homebuyer-occupant demand will ultimately determine whether and how fast construction starts for SFRs and condos will continue to climb. Currently, speculator acquisitions at less than 25% of ownership turnover — while significant to interfere — no longer dominate California’s home sales volume. This intervention subsided through 2015 and will continue at an even lower rate in 2016. As prices slip in 2018, expect speculators to return to grab up properties in anticipation of continuous price rises into 2019-2021.

However, builders rely upon buyer-occupants to support new home construction, deliberately culling out speculators as buyers in staged tract developments and slow selling projects. Discouraged by low inventory and high home prices, buyer-occupant demand to purchase a home in 2017 remains stunted. This is demonstrated by relatively low sales volume participation and mortgage origination figures. Builders will continue to bide their time until sales volume figures for buyer-occupants pick up, likely in 2019 as prices begin to rise again.

Employment drives demand

When speculators interfere, home sales volume and pricing display a distorted picture of demand. However, builders need to look to jobs data and mortgage rates as the primary impetus for demand when they set the level of starts that will likely sell.

California has finally recovered all jobs lost in the Great Recession but at wages which do not cover the interim inflation. Still, considering the intervening population gain (around 3 million), full employment and labor force participation comparable to the December 2007 peak is not expected to be reached until 2019.

Obstacles facing SFR builders

Obstacles of concern to future construction starts include:

  • rising mortgage rates — ARMs first, then FRMs — reducing homebuyer borrowing capacity;
  • tightened credit for homebuilders; and
  • restrictive zoning regulations, which discourage density in desirable living areas.

Until these factors are considered and a conclusion reached, builders (and their lenders) may not take for granted that construction starts will pay off. Expect starts to only modestly increase until these factors collectively improve, around 2019.

Related article:

California Residential Vacancy Rates