California’s housing crisis continues to worsen. With rents and home prices rising beyond the reach of median incomes, homelessness has increased significantly in the last few years.
The main culprit of the crisis is a major housing shortage. The natural solution is more residential construction.
How is the residential construction market faring across the state?
Depending on where you’re looking in California, residential construction has increased almost every year since the housing market bottomed in 2009-2010. But at the same time, the state’s population has increased at a much higher rate.
For example, in Los Angeles, 16,800 new residential permits were granted in 2017, including permits for single family residences (SFRs) and multi-family units. Also during 2017, the county’s population grew by 25,600 individuals. This roughly 9,000-unit deficit sounds bad, but only at first glance. Truthfully, not every new person needs their own place to live. A lot of this growth is due to new births, while only some of it is due to new household formations.
Therefore, to get a better understanding of the need arising from population growth, we can divide this population increase of 25,600 individuals by the average household size, which is just below 3 persons per household in 2017. This leaves us with a household increase of roughly 8,600 in Los Angeles, actually less than the number of residential units started in that single year.
Doing this math of residential construction starts compared to household growth in California’s various metro areas, we are left with this picture:
Chart update 08/19/19
| 2017 Household Change | 2017 Construction Starts | Construction versus Household Formation | |
| Los Angeles | 8,600 | 16,800 | +8,100 |
| Orange County | 6,000 | 9,600 | +3,500 |
| Riverside | 12,000 | 6,400 | -5,600 |
| Sacramento | 5,500 | 2,300 | -3,100 |
| San Diego | 6,700 | 8,200 | +1,500 |
| San Francisco | 4,600 | 3,600 | -900 |
| Santa Clara | 6,400 | 6,500 | +200 |
In the chart above, three of California’s major metros saw positive construction numbers compared to household growth in 2017:
- Los Angeles;
- Orange County;
- San Diego; and
- Santa Clara.
In contrast, other metros have remained in negative territory since the letdown from the 2008 recession, including:
- Riverside;
- Sacramento; and
- aside from a brief jump in 2016, San Francisco.
Larger trends show bigger construction concerns
While 2017 alone is mostly positive for the number of construction starts, this comes after several years of very low construction throughout the state.
When the Millennium Boom’s housing bubble popped in 2007, builders exited the scene quickly. Statewide, residential construction fell in 2009 to a quarter of the 2005 peak. Since, then, construction has begun its recovery, but remains at just 40% of 2005 levels as of 2018. Today’s rising construction numbers are merely catching up with the losses experienced over much of the past decade.
Zooming out even further, California’s total number of construction starts in 2018 was 31% below the historical average, calculated each year since 1960.
Further, though the chart above doesn’t show price tiers, the majority of new construction built in recent years has been in the mid and high tiers. This, despite the fact that the state’s population increase hasn’t been limited to just the moderate- and high-income earners. As the supply-and-demand imbalance has grown for low-income households, where has the growing low-income population been moving to?
Lower-income renters and homebuyers have been relegated to suburbs — when they can find housing at all. Those on the very bottom of the income ladder have simply been pushed off, evidenced by the growing homelessness crisis across the state.
For construction to reach a full recovery, zoning limitations will need to lift in the state’s most desirable areas. Expect the next construction peak to occur around 2022-2023, coinciding with a demand convergence from first-time homebuyers and retiring Baby Boomers following the conclusion to the next recession.
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