Single family residential (SFR) starts were 17% below one year earlier in the six-month phase ending March 2019. Multi-family construction starts were down 7% from a year earlier.
Multi-family construction remained steady in 2018, with year-end totals the same as the prior year. 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 continued to rise in 2018, turning in a 9% increase over 2017. While positive, this rate of increase was down from the previous year, which saw a 17% rise. Expect SFR construction to continue to slow through much of 2019, the result of rising mortgage rates, slowing sales volume and decreasing home prices. Further, compared to the 150,000 SFR starts achieved in 2005 at the height of the boom, even 2018’s positive performance – resulting in 62,600 SFR starts – is a fraction of what is needed to meet demand.
Like SFR construction, multi-family starts amount to just a small amount of what is needed to keep up with rising demand from California’s growing population. State-initiated legislative efforts to add to the low- and mid-tier housing stock have focused on encouraging more multi-family construction. Therefore, the slowing in multi-family construction will not be as steep as that experienced for SFR starts, even as home sales continue to slow across California.
Updated April 24, 2019. Original copy posted November 2012.
This chart illustrates the number of California residential construction starts during semi-annual phases ending in March and September.
Chart update 04/24/19
|Six-month period ending||Mar 2019||Sep 2018||Mar 2018|
Chart update 02/27/19
*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:
- 25,200 SFR starts took place in the six-month period ending March 2019. This is 5,300 fewer starts than occurred during the same period one year earlier.
- 62,600 SFR starts took place in 2018. This is up 9%, or 4,500 starts, from 2017.
- A slower pace of increase is expected to occur in 2019.
- 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 2019 is approximately 60,000. This is 4% lower than 2018.
- SFR starts will fall back in 2019, as builders adjust to slowing sales volume and decreased home prices, all the result of rising interest rates.
- 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:
- 25,900 multi-family housing starts took place in the six-month period ending March 2019. This is a decrease of 1,900 starts from the same period one year earlier.
- 53,800 multi-family housing starts took place in 2018. This was level with 2017, 6% higher than 2016.
- 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 2019 is approximately 56,500. This is a small 5% increase over 2018.
- Multi-family housing starts will continue steady in 2019 and 2020, as several legislative changes aimed at increasing multi-family construction encourage more building of dense, low- and mid-tier housing.
- 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.
- 17.4 million people were employed in California at the end of 2018. This is about 1.7 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 1.8 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 2019, not to rise significantly until the next recession has come and gone, expected in 2020. The pace of this rise is dependent on several factors, discussed below.
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.