Single family residential (SFR) starts were 10% below one year earlier in the six-month phase ending July 2020. Multi-family construction starts were down 4% from a year earlier, continuing the downward trend from 2019.
Multi-family construction experienced a total 6% decrease in 2019 from the prior year. Demand for multi-family rentals has generally been higher during this past decade compared to new SFRs. But new multi-family construction has faced obstacles in the form of outdated zoning and vocal not-in-my-backyard (NIMBY) advocates.
SFR construction starts also saw 2019 totals lower than the previous year, turning in a 5% decrease from 2018. SFR construction has continued to slow in 2020, the result of a slowing economy and more cautious homebuyers. Further, compared to the 150,000 SFR starts achieved in 2005 at the height of the boom, the 59,200 SFR starts achieved in 2019 is a fraction of what is needed to meet demand.
State-initiated legislative efforts to add to the low- and mid-tier housing stock have focused on encouraging more multi-family construction in recent years. However, social distancing and tightening lines of credit are holding builders back in 2020. Further, significant job losses have made builders more cautious, watchful for slipping demand. All of these factors will combine to put downward pressure on multi-family starts in 2020-2023.
Updated September 22, 2020. Original copy posted November 2012.
Chart 1
This chart illustrates the number of California residential construction starts during semi-annual phases ending in January and July.
Chart update 09/22/20
| Six-month period ending | Jul 2020 | Jul 2019 | Annual change |
| SFR Starts | 27,200 | 30,200 | -10% |
| Multi-family Starts | 21,400 | 22,300 |
-4%
|
Chart update 02/19/20
| 2019 | 2018 | 2017 | 2005 peak | |
| SFR Starts |
59,200
|
62,600
|
58,000
|
154,700 |
| Multi-family Starts |
50,700
|
53,800
|
53,800
|
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:
- 27,200 SFR starts took place in the six-month period ending Jul 2020. This is 3,000 fewer starts than occurred during the same period one year earlier, a 10% decrease.
- 59,200 SFR starts took place in 2019. This is down 5%, or 3,400 starts, from 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, slightly down during the past 12 months.
Detached SFR forecast:
- first tuesday‘s forecast for total SFR starts in 2020 is approximately 53,000. This is about 10% lower than 2019.
- SFR starts have fallen back in 2020, as builders adjust to social distancing restrictions, slowing sales volume and flattening home prices.
- Subdivision final reports will continue to decline as developers until sense a return of home buyers is on the horizon.
- The next peak in SFR starts will likely occur during the boomlet period of 2022-2023.
Multi-family housing construction trends:
- 21,400 multi-family housing starts took place in the six-month period ending July 2020. This is 800 fewer starts than occurred during the same period one year earlier, a decrease of 4%.
- 50,700 multi-family housing starts took place in 2019. This was 6% lower than 2018.
- 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 2020 is approximately 48,000. This is down about 5% from 2019.
- Multi-family housing starts were expected to rise at a gradual pace in 2020, as several legislative changes aimed at increasing multi-family construction encourage more building of dense, low- and mid-tier housing. However, social distancing restrictions and tightening lines of credit will keep multi-family construction numbers from living up to its full potential.
- The next peak year for multi-family housing starts is likely to occur around 2022-2023, with the crest of the next housing boom.
Statistics related to California housing:
- 7.0 million owner-occupied housing units existed in California in 2017, according to the U.S. Census Bureau. This is a slight increase 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.
- 15.67 million people were employed in California in mid-2020. This is 11.5% below the pre-2020 recession peak month of December 2019, according to the California Employment Development Department (EDD).
- The rental vacancy rate averaged 4.2% in 2019.
Construction starts will continue to falter in 2020, not to rise significantly until we have recovered from the present recession. 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 later in 2019 or perhaps 2020.
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 2022-2023.
Related article:
It would be helpful to know if any of the multi-family construction increase is privately financed as opposed to gov’t subsidized (ie: “affordable” construction.
Lots of useful information, thank you. I noted the construction chart going back to the 1980’s. The chart shows a total collapse of multi-family development beginning about 1986. I wonder how much of this may have been caused by the Reagan tax changes? Prior to that there was a period where limited partnerships built or bought apartments and commercial properties. After the tax change many people decided it was better to invest in a larger personal residence rather than a small income property and the limited partnership industry disappeared. Any thought on how tax law and government policy other than zoning laws can affect change?
If you add factors of living in CA… it is extremely costly. Land banking will do good but… having such a high tax state with cost of living so high… plus capital gain on both Federal and State end… does it really make sense???
I used to be positive about CA… real estate… as an investment…
Your own home, ok, but mortgage plus high property tax plus all others…
What is your intake?
New construction will only come back when we stop some of the wayward government t programs. No more debt forgiveness and no more refinancing underwater properties (Harp). It’s time to let the marketplace get back to normal buyer and seller demand conditions so employment will return and demand will new homes will follow. Just hope we elected the right person this time around.
THE BLACK SWAN
It interests us how so many persons, when offering their predictions as to what turn future events and trends might take, virtually NEVER figure in a black swan event.
What is that? A black swan event is a dramatic, even cataclysmic event that comes on suddenly and unexpectedly and can have a drastic effect on any prognostication based solely on observable, historical, or cyclical trends.
The huge storm in the East–hurricane Sandy–is a type of black swan event. A huge earthquake would be one on the West Coast. Such things can turn the trend-lines upside down. Massive damage means massive reconstruction. Is it good or bad for the economies so affected?
MASSIVE SOLAR EVENT IN THE NEAR FUTURE?
And no one is figuring in the possible catastrophic solar event that astrophysicists are saying could very likely hit before the end of 2012 or during 2013. (for more info on that see: AthenaAcademy.net/home/current_news). Would such an event bring negative consequences or positive? Apparently Earth has gone through such monumental solar events in the past.
Builders are “Re-active” to demand. They are NOT Pro-Active and build for the DEMAND. Long term investors shoot for 5-10 years out like me. I bought thousands of Acres in 2009 to 2012 at the BOTTOM BOTTOM LOW! Builders are consumers of LAND.