California is about to discover it has an oversupply of classic subdivision housing, according to a report released by the Urban Land Institute (ULI) analyzing demographic and construction trends in California’s metropolitan regions. Generation Y (Gen Y) individuals are gearing up to form households this decade, and developers anticipate a diminished demand for large single family residences (SFRs) in favor of condominiums and apartments — multi-family housing units.

As a result, the vast inland expanse of California neighborhoods populated by homes on lots larger than 5,000 square feet will have difficulty finding occupants once Baby Boomers retire to smaller homes. Unless builders begin working on more apartments and townhouses, first-time homebuyers in the coming years may not find the type of housing they want.

first tuesday take:  All this portends a rise in urban housing pricing over and above consumer inflation in terms of either rent or sales price. Not only is there a great lag between the conception and completion of a residential project after acquiring a developable property, but a tricky zoning issue stands in the way of progress.

It is foreseen that coming generations will not cling to the American Dream of suburban “open range” living like those before them, but these suburban neighborhoods will remain an appealing choice for those who prefer detached housing, personal yard space and significantly lower cost of ownership over the cultural and professional proximity of urban dwellings. [For more information regarding California suburbia, see the July 2011 first tuesday article, The fate of suburbia.]

Baby Boomers have traditionally been homeowners — a trait they will carry into retirement. For this retiring generation, homeownership was and will remain a cornerstone of traditional American values with no desirable alternative. They will, however, most likely sell and purchase smaller SFRs close to the residences of their children and grandchildren. [For more information regarding Baby Boomer housing trends, see the September 2011 first tuesday article, Boomers will always be homeowners and the September 2011 first tuesday article, Boomers bust open doors to real estate investment era.]

Their progeny, on the other hand, have no such convictions.

Gen Y individuals (those born in the 1980s and 1990s) are more likely to rent indefinitely and cohabitate with friends or family — a result of growing up with parents who bought during the Millennium Boom only to fight off foreclosure during this still unfolding Lesser Depression. Due to better education and professional services orientation, Gen Y tends to favor housing in denser, urban areas closer to their jobs, public transportation and other amenities. [For more information about renting trends, see the May 2011 first tuesday Market Chart, Rentals: the future of real estate in CA? and the February 2011 first tuesday article, The generations have spoken, who will listen?]

Suburban neighborhoods will not experience devastating blight or vacancy as a result of Gen Y’s transition away from SFRs. Our lesser educated and under-skilled population drawn to the state to provide an increasing demand for basic services will need housing, but first tuesday predicts future demand for SFRs will shrink dramatically for at least a decade. Prices for these SFRs will not keep up with inflation until that adjustment in population is completed.

New housing construction and permissive zoning moving forward must reflect the evolving needs of the coming generation. The traditional precedent for housing set by the Baby Boomers, old-thinking land use planners and the Greatest Generation before them has suddenly taken on a new direction as the trauma of the 2007 housing crash sinks in. [For more information regarding urban housing, see the June 2011 first tuesday article, It’s all happening in the city, eventually.]

Although there will be little demand for new detached or attached SFR construction in the first half of this decade as Gen Y continues to pay off student debt and find employment, city governments can take action now to plan and zone for construction of high-density condos and apartments in center city locations where Gen Y is most eager to work and live.

If not rezoned, urban prices will soar out of control until planners get it right.  For starters, think proximity to town hall.  [For more information regarding construction, see the November 2011 first tuesday article, Factors in construction forecasting.]

Re: “Report: Sacramento-area housing shift seen as suburban spreads lose appeal” from the Sacramento Bee and “The New California Dream” from the Urban Land Institute