After 18 months of decline, single family residential (SFR) starts turned positive at 31% above one year earlier in the six-month phase ending June 2021. During those same six months, multi-family construction starts also reversed course, up 26% from a year earlier. 

Multi-family construction experienced a 9% decrease in 2020 from the prior year, with 47,000 new units started. Demand for multi-family rentals has generally been higher during this past decade compared to new SFRs. But, on top of the unique pandemic-induced obstacles facing builders in 2020-2021, new multi-family construction continues to hit roadblocks in the form of outdated zoning and vocal not-in-my-backyard (NIMBY) advocates.

SFR construction starts were roughly level with the previous year in 2020. This type of construction experienced growth of just under 1% from 2019, with 500 more starts over the course of a year for a total of 59,000 new SFRs started. SFR construction will slow in 2021, the result of a damaged economy and cautious builders. Further, compared to the 150,000 SFR starts achieved in 2005 at the height of the boom, the 59,000 SFR starts achieved in 2020 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. As a result, metro areas with the highest annual increase in construction include Sacramento, Bakersfield and San Diego. At the same time, the deepest losses have been experienced where zoning remains restrictive for this type of housing, including in San Francisco, San Jose and Los Angeles.

After over a year of social distancing and tightened lines of credit, builders are finally cashing in on legislative incentives and rising homebuyer demand. However, significant job losses have made builders cautious, watchful for the inevitable fallout from the expiration of the foreclosure and eviction moratoriums, to put downward pressure on home prices and rents heading into 2022. All of these factors will combine to hold back multi-family starts from reaching their full potential for the next two-to-three years.

Updated August 19, 2021. 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 08/19/21

 Six-month period ending Jun 2021 Jun 2020 Annual change
SFR Starts 35,100 26,800 +31%
Multi-family Starts 25,400 20,100
+26%

Chart 2

Chart update 05/18/21

  2020 2019 2018 2005 peak
SFR Starts
59,000
58,600
58,800
154,700
Multi-family Starts
47,000
51,600
54,700
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:

  • 35,100 SFR starts took place in the six-month period ending June 2021. This is 8,300 more starts than occurred during the same period one year earlier, a 31% increase.
  • 49,800 SFR starts took place in 2020. This is down 16%, or 9,400 starts, from 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 Department of Real Estate (DRE) have declined during the past 12 months.

Detached SFR forecast:

  • first tuesday‘s forecast for total SFR starts in 2021-2022 is most affected by the downward pressure placed by a recessionary jobs market. Expect SFR starts to remain low in the next two years, until the recovery begins to pick up steam, likely around 2023-2024.
  • SFR starts fell back in 2020, as builders adjusted to social distancing restrictions, slowing sales volume and tightening access to credit.
  • 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 2024-2025.

Multi-family housing construction trends:

  • 25,400 multi-family housing starts took place in the six-month period ending June 2021. This is 5,300 more starts than occurred during the same period one year earlier, an increase of 26%.
  • 36,600 multi-family housing starts took place in 2020. This was 28% lower than 2019.
  • 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 multi-family housing in 2021-2022 is a roughly level number of starts with 2020. As the jobs recovery is still stuttering in  2021, lenders continue to keep a tight fist on funds, hampering builders.
  • Multi-family housing starts were expected to rise at a gradual pace in 2021-2022, 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 pushed multi-family construction numbers down significantly.
  • The next peak for multi-family housing starts is likely to occur around 2024-2025, with the full recovery of all jobs lost to the 2020 recession and a crest of the next housing boom.

Statistics related to California housing:

  • 14.4 million total housing units existed in California in 2019, 13.2 million of which are occupied and 7.2 million of which are owner-occupied, according to the U.S. Census Bureau. This continues a slight increase over prior years.
  • California population growth is increasing at a rate of 0.5%-1% per year, having declined slightly each year since 2014.
  • 16.4 million people were employed in California in June 2021. This is 1.4 million fewer jobs than were held prior to the 2020 recession, according to the California Employment Development Department (EDD).
  • The rental vacancy rate averaged 4.1% in 2020.

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.

Obstacles facing SFR builders

While end user homebuyer-occupant demand is the ultimate driver of construction starts, several obstacles face builders in 2021-2022 that will determine the pace of SFR and condo starts. 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 remained stunted through 2019. However, 2020 saw interest rates plunge to record lows, which boosted buyer interest, a need unfulfilled by available resale homes since sellers remained timid in 2020. Yet, builders were largely unable to meet homebuyer demand due to social distancing measures and tightened access to credit.

Obstacles of concern to future construction starts include:

  • the historic job losses of 2020, which will take years to recover;
  • tightened credit for homebuilders;
  • beginning in 2023, rising mortgage rates, reducing homebuyer borrowing capacity; 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 remain low until most of these factors collectively improve and starts have another 12-18 months to catch up, likely to occur around 2024-2025.

Related article:

California Residential Vacancy Rates