Single family residential (SFR) starts were 7% below one year earlier in the six-month phase ending September 2020. During those same six months, multi-family construction starts were down 20% 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 But new multi-family construction has faced obstacles in the form of outdated zoning and vocal not-in-my-backyard (NIMBY) advocates.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 November 19, 2020. Original copy posted November 2012.

Chart 1

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

Chart update 11/19/20

 Six-month period ending Sep 2020 Sep 2019 Annual change
SFR Starts 29,100 31,100 -7%
Multi-family Starts 20,500 25,500

Chart 2

Chart update 02/19/20

  2019 2018 2017 2005 peak
SFR Starts
Multi-family Starts

*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:

  • 29,100 SFR starts took place in the six-month period ending September 2020. This is 2,100 fewer starts than occurred during the same period one year earlier, a 7% 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:

  • 20,500 multi-family housing starts took place in the six-month period ending September 2020. This is 5,000 fewer starts than occurred during the same period one year earlier, a decrease of 20%.
  • 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 45,500. This is down about 10% 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.
  • 16.7 million people were employed in California in September 2020. This is 8.5% below the number of jobs held a year earlier, 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.

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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.

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