Homebuilders are pulling back from new construction, contrary to what economists say is necessary to ease California’s housing affordability crisis.
In the first six months of 2019, builders obtained approval for 51,178 new homes in California, almost 20% lower than the same period a year earlier. This puts the state on track for the first significant annual decline since the recession.
In the Los Angeles-Orange County metro area, the total number of permits – an indication of future construction – has fallen 25%, according to data from the US Census Bureau. Permits for single-family homes fell 18.5% in the region, while those for multi-family projects such as apartment buildings – a category in which activity tends to be more volatile – fell 28.6 %.
“We are going exactly in the wrong direction,” said Christopher Thornberg, founding partner of Beacon Economics.
Economists, developers and trade groups have said the slowdown in permits has a simple explanation: It has become more difficult to make money building houses.
Home prices and, to a lesser extent, rents, have softened as Californians have a harder time stretching their dollars and pulling back from stratospheric prices. Sales of existing and new homes have plummeted, forcing some builders to cut prices for developments already underway.
In June, sales fell 8.8% in southern California’s six counties. The median selling price was $ 541,250, up just 1.2% from the previous year.
At the same time, construction costs are high and, by some measures, continue to increase. For new projects, the builders said, there is a limit at which they can set prices or rents to fuel demand.
Builders cited the high costs of land, labor, materials and government fees, as well as tariffs on a myriad of construction products and appliances. Over the past year, they said, the potential benefits of many new projects have diminished to the point that it no longer makes sense for builders or their financiers to take the risk.
“You can’t just wish yourself high rents and make a project feasible,” said Kevin Farrell, chief operating officer of apartment developer Century West Partners.
“No one is interested in making loans to lose money,” said Scott Laurie, general manager of Olson Co., which builds single-family and urban homes in Southern California.
Last year, Laurie said, he walked away from a townhouse project Olson was planning in northern Orange County, forgoing a deposit of more than $ 1 million as the costs Construction projects surged and he wasn’t convinced that potential buyers would pay a price that would do the trick in pencil.
According to John Burns Real Estate Consulting, labor and material costs rose 7.2% in June in Northern California from a year ago, while home prices were essentially stable. In Southern California, costs rose 2.1% while prices rose 2%. In March, costs rose 4.1% while prices remained stable.
Rick Palacios, director of research at John Burns, said developers are always cautious in a slowing or declining market, fearing their plans may not be fulfilled. In addition, the start of 2018 was a relatively strong period for housing construction, making comparison with this year particularly difficult.
On the bright side, Palacios said construction costs have shown signs of stabilizing. And some home builders say lower mortgage rates have drawn more people into the market. The average rate on a 30-year fixed mortgage was 3.6% this week, down from 4.94% in November, according to Freddie Mac. The drop would save $ 314 per month if the buyer put 20% less on a $ 500,000 home.
In Los Angeles, developers have also inundated the city with proposals to build dense projects thanks to a new program that has relaxed zoning and streamlined approval near transit lines. But many of these projects have not been approved or have not been inaugurated, and developers elsewhere still often face a long approval process before they can build.
Even before sales slowed sharply over the past year, investors were focusing on deals with ready-to-build lots, or so-called titled land, rather than projects that required tedious government approvals to open the market. way. But now there are fewer lots ready to go and investors have become even less optimistic, said Michael Marini, director of developer Planet Home Living. “It’s worse now,” he said. “Everyone only wants authorized land. “
Permits also fell nationally, by 6% in the first half of the year. Thornberg, of Beacon Economics, said the drop is worst in California because the market has slowed the most on the more expensive homes, which fill much of the California coast.
He said it was extremely difficult to build moderately priced housing in California, given high costs, tough environmental laws and shrinking neighborhoods that are delaying projects and driving up costs. He and other economists argue that the main reason a 1,640-square-foot 1920s Silver Lake house sells for almost $ 1.5 million is that for decades too few homes were built. relative to population and employment growth.
The slowdown in construction could shape some of the discussion about how to deal with the housing crisis in the state. Richard Green, director of the USC Lusk Center for Real Estate, said the government should make it more profitable to build moderately priced homes by private companies by lowering fees and allowing more homes on individual lots.
Tenant groups have called for stricter rent control laws, seeing the private market as insufficient to cope with the crisis. Mark Vallianatos, director of policy at advocacy group Abundant Housing LA, said the government may also increasingly step in to subsidize projects or support nonprofit developers during a downturn.
“We should use this slowdown as an opportunity to remove barriers to the traditional type of house building and also advance new ones,” he said.
In places like Oregon, Nevada and Arizona, it’s much easier to build affordable housing, said Dan Dunmoyer, president of the California Building Industry Assn. As demand weakens, he said, companies in those markets can keep building longer and, if there is a downturn, come back faster.
Laurie, from Olson Co., said land sellers have also become a little “more realistic” with their prices, which may help more builders like him innovate. But it’s always hard to find places to build the $ 400,000 to $ 650,000 homes the company specializes in.
“We want the same thing as buyers of affordable homes – they want to buy an affordable home and we want to build it,” he said. “But at the moment there is a limited amount of land to build at these prices. “