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California’s Housing Market Finds Itself in Dire Straits
While the underlying demographics for housing remain strong in California and are expected to gain even greater strength as its population continues to grow, the immediate outlook is grim and the industry remains in dire straits, representatives from the California Building Industry Association (CBIA) told the media at a June 25 news conference in San Francisco during the annual PCBC conference and tradeshow.
The state’s home building industry will languish well into next year, with some areas performing noticeably better than others, and the marketplace could sustain even more damage if lawmakers fail to move forward with stimulus legislation aimed at propping up the economy by stabilizing housing conditions.
“Without reforms being considered right now in Sacramento and Washington, D.C., I fear many more builders will go out of business and many more jobs will be lost,” said Ray Becker, a Bay Area developer and this year’s chair of CBIA. “Equally important, this attrition will make it even more difficult to ramp up production when the market finally does start to turn.”
In a sharp plunge from peak levels averaging about 210,000 units in 2004 and 2005, this year’s construction levels are projected to sink below 80,000 permits, to the lowest level since those figures first started being compiled in 1954, noted Robert Rivinius, the association’s president and CEO.
“We need 230,000 starts a year just to meet our growing population,” Rivinius said.
Despite the current housing slump, California’s population will grow by 490,000 this year alone, said Alan Nevin, CBIA’s chief economist, reaching 38 million and advancing to 40 million by 2011, not counting residents who are illegal immigrants.
“It doesn’t appear to make much difference whether there are jobs here or housing here,” Nevin said. “We just keep growing.”
On the employment front, the state’s residential real estate sector clearly has borne the brunt of the economic downturn, with nearly 200,000 home building-related jobs lost during the past two years — before counting the negative impact on furniture distributors, interior decorators, landscapers and others who increasingly have been going out of business.
“During the past two years, the state reported a loss of 181,300 construction, finance and insurance jobs,” Nevin said. “But in fact, the job losses related to construction have been much more severe as the multiplier effect of the construction industry is higher than any other.”
He added that the downturn has also crippled state and local government budgets due to the lost revenue from taxes and development fees.
On the plus side, Nevin said, the state’s unemployment rate is barely up thanks to ongoing growth in such key areas as manufacturing and tourism. Unlike the Midwest, which is suffering from systemic economic problems, California’s housing market overall is poised to move up rapidly once it bottoms out.
Nevin said that he has had to pare down his housing forecast from fairly upbeat levels foreseen at the start of the year because of “double trouble” stemming from last summer’s subprime mortgage meltdown and the accelerating price of fuel.
Single-family permits in 2008 now are likely to slip to 38,000, down from a peak of more than 155,000 in 2005; and with the condo market at a standstill, multifamily construction will fall to 34,000 from a peak of less than 62,000 in 2004, with activity generated by “apartment builders buying condo sites and building apartments on them.”
The sharp home price declines being posted on various indexes for California tend to be overstated, Nevin said, because they are only based on homes sold, and 40% of those have involved foreclosures. In the Riverside and Sacramento areas, more than 70% of home sales have been in foreclosures.
Foreclosures have been less pronounced in markets close to the Pacific Coast, he said. “We are not anticipating a return to vitality in the rest of 2008 and 2009,” he added. But “foreclosures are making their way through the smoke and will decline dramatically by the end of the year. This will bring a new level of stability to the market, and resales will start back up.”
Concerned that many more builders will shutter their businesses without help from the state legislature, Becker said that builders in California are seeking some short-term relief:
- An extension of the life of subdivision maps, which only last for two years in a state where the entitlement process can take five to 10 years.
- A deferral of fee payments, which can be due when pulling the building permit.
Builders in California have also joined the national effort to urge Congress to pass a comprehensive housing and economic stimulus bill as soon as possible. In a state with high housing prices that have typically pushed home buyers into jumbo mortgages, of particular interest is increasing loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration permanently, he said. Under the Bush Administration’s first stimulus bill, higher loan ceilings expire at the end of this year.
Also appearing at PCBC, a panel of economists from the University of Southern California's Lusk Center for Real Estate, while not downplaying the seriousness of the current situation and the need for a legislative response, presented evidence suggesting that the state’s housing market is moving toward a position in which it will be poised for recovery.
That story, and others from PCBC, will be reported in the July 14 issue of NBN.
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