116,400 housing units were started in California during 2018, a slight 4% increase over 2017. This level of construction was a significant 31% below the historical average of 169,100 annual starts.

Single family residential (SFR) starts continued on a slight upward trajectory in 2018, while multi-family construction remained level with the prior year. For construction to reach a full recovery, zoning limitations will need to lift in the state’s most desirable areas. Expect construction to reach a peak around 2022-2023, coinciding with a demand convergence from first-time homebuyers and retiring Baby Boomers following the conclusion to the next recession. 

Updated July 14, 2019. Original copy posted March 2016.

 

 

2018 construction starts Average annual construction starts Difference
California construction starts 116,400 169,100 -52,700 | -31%

The bars in the chart above indicate the deviation from the average annual construction of housing units in California (the left axis). The line that follows the bars corresponds with the actual number of construction starts completed each year (the right axis).

Since 1960, the average construction units started each year hovers just above 169,000 — the horizontal line in the chart above. However, most years since 1990 have seen starts far below the historical average. In 2018, a total of 116,400 housing units were started, consisting of a mix of single family residential (SFR) and multi-family starts. This was 31% below the historical average.

Based on the current trends in home sales volume and home vacancies, construction starts won’t likely return to average levels until well into the 2020s.

In the meantime, where is California’s growing population living? It’s hard to imagine how household formations are able to occur when new construction has been below average levels almost every year since 1990.

california-annual-population-change-2017

In fact, California’s population has steadily increased each year, despite lagging construction which fails to keep up with population increases.

Return from excess

Redfin completed a similar comparison of national construction numbers against the nationwide average experienced since 1970. However, Redfin’s nationwide chart doesn’t paint the full picture of the excess construction which occurred in California during the 1960s through 1980s.

In 1960 — when the charts above begin — there were 5.5 million housing units. Since then, housing has increased 156% to just over 14 million housing units, as of 2016. Unlike California’s steady population increase, most of this construction occurred rapidly during 1960s through the late-1980s.

In the meantime, California’s population has increased around 2% each year, totaling a 147% increase over 1960 — which is basically the same increase that has taken place in construction.

Therefore, while today’s construction falls well below the historical average, another factor is at play that continues to keep all of California’s residents housed: the building that took place throughout the 1960s, 1970s and 1980s was in fact overbuilding. So much housing was built that California had no need to return to those inflated years in the 1990s, the 2000s or in this decade.

Housing analysts say more housing units need to be built to keep up with population growth, and they are right, to an extent. Yes, today’s population is increasing much more quickly than construction is able to keep up. However, they fail to acknowledge the excess building which took place decades ago.

That being said, more construction is started each year since the recession bottomed in 2009. 2018 saw 4% more starts than 2017, though the trend is falling off in 2019. While housing demand is rising, as young adults (members of Generation Y) increasingly leave parents and roommates behind to form more households, insufficient construction continues. This is due to high costs, zoning/permitting issues and an increasing construction labor shortage.

In particular, over-restrictive zoning laws have led to airtight markets in desirable areas. San Francisco is a prime example of zoning regulations run amok. There, the resulting building crunch has caused prices to increase far beyond the reach of most residents, causing a rental crisis that continues to make national headlines.

For construction to reach its full potential, zoning will have to lift. This is particularly true for high demand areas. These coincide with parts of the state that experience the strongest job performance, like San Francisco, San Jose, San Diego and parts of Los Angeles.