Single family residential (SFR) starts rose 10% over one year earlier in the six-month phase ending September 2018. Multi-family construction starts also increased, rising 7% from a year earlier. This rate of rise is down from earlier in 2018 for both types of construction.

Multi-family construction was down in 2016 but rebounded slightly in 2017, ending the year 6% above 2016. 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 starts picked up speed in 2017, turning in a 17% increase over 2016. Expect SFR construction to continue to rise at a similar pace through much of 2018. But compared to the 150,000 SFR starts achieved in 2005 at the height of the boom, even 2017’s positive performance – resulting in 58,000 SFR starts – is a fraction of what is needed to meet demand.

Multi-family construction reports showed a slight 6% increase in 2017. However, rental vacancies remain low in 2018, 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 October 31, 2018. Original copy posted November 2012.

Chart 1

This chart illustrates the number of California residential construction starts during semi-annual phases ending in June and December.

 

Chart update 10/31/18

 Six-month period ending Sep 2018 Mar 2018 Sep 2017
SFR Starts 34,200 30,500 31,200
Multi-family Starts 26,700 27,800
28,800

Chart 2

 

Chart update 01/31/18

  2017 2016 2015 2005 peak
SFR Starts
58,000
49,400
44,100
 154,700
Multi-family Starts
53,800
51,200
53,500
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:

  • 34,200 SFR starts took place in the six-month period ending September 2018. This is up 10% from the same period one year earlier, amounting to an increase of 3,000 starts.
  • 58,000 SFR starts took place in 2017. This is up 17%, or 8,600 starts, from 2016.
  • A similar pace of increase is expected to occur in 2018.
  • 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 2018 is approximately 66,700. This is 15% higher than 2017.
  • SFR starts will begin to rise more significantly in 2019, 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:

  • 26,700 multi-family housing starts took place in the six-month period ending September 2018. This is an increase of 2,900 starts, up 7% from the same period one year earlier.
  • 53,800 multi-family housing starts took place in 2017. This was up 6% from 2016 and roughly level with 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 2018 is approximately 56,400. This is a small 5% increase over 2017.
  • Multi-family housing starts will gain more strength in 2019 and 2020, once several legislative changes aimed at increasing multi-family construction start rolling.
  • 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.
  • 17.1 million people were employed in California at the end of 2017. This is about 1.4 million jobs above the pre-recession peak month of December 2007, according to the California Employment Development Department (EDD), still 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 2017 was 4.3%.

Construction starts will continue to falter somewhat in 2018, 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. Builders rely on buyer-occupants to support new home construction. Discouraged by low inventory,  high home prices and rising interest rates, buyer-occupant demand to purchase a home in 2018 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.

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