The rising trend in California construction

starts
July 6, 2014 | In Charts, Home Sales, Latest Articles
Single family residential (SFR) starts rose in the six-month period ending May 2014. SFR starts
rose 14% over the six-month period ending in November 2013 and a meager 6% over the
same period one year earlier.
On the brighter side, multi-family constructions starts rose 39% in the six months ending
May 2014 over the six-month period ending November 2013. Multi-family starts are up 31%
from the same period one year earlier.
34,000 SFR starts took place in 2013, up 25% from the prior year. However, last years rise in
SFR starts rose from a very low level and was largely due to speculator interference in the home
resale market, encouraging owner-occupant buyers to skip the bidding wars and opt for new
homes. SFR starts will likely rise weakly for the rest of 2014, still adjusting to the mid-2013 rise
in mortgage rates.
There were 41,000 multi-family starts in 2013, up 39% from the prior year. The increase in
multi-family starts is being driven by a demand shift from ownership to rentals. Multi-family
housing starts will continue increasing but at a slower annual pace of roughly 20% into 2015.
Chart 1

This chart illustrates the number of California residential construction starts during semi-annual
six-month periods ending in April and November.
Chart update 06/26/14
Six-month period ending May 2014 Nov 2013 May 2013
SFR Starts 20,900 18,292 19,666
Multi-family Starts 26,546 19,144 20,192

Chart 2

Chart update 01/31/14
2013 2012 2011 2010 2005
SFR Starts 33,749 27,037 21,538 25,526 155,322
Multi-family
Starts
41,365 29,668 25,554 19,236 53,650
*Forecasts are based on current new homes sales trends, actual construction starts and current
government policies.
Detached single family residential construction trends in California:
20,900 SFR starts took place in the six-month period ending May 2014. While this is up
6% from the same period one year earlier, this amounts to only a 1,234 increase in starts
over the same six-month period ending one year earlier. This is not historically
significant.
34,000 SFR starts took place in 2013. This is up 25% from 2012.
The trend in the number of SFR starts for the remainder of 2014 is expected to be roughly
level with 2013.
For perspective, this cycles peak year in SFR starts was 2005 with 155,322 starts. The
lowest year was 2009 with 25,031 starts.
Final reports issued for new subdivisions by the California Bureau of Real Estate
(CalBRE) have remained constant for several years, jumping 30% during the past 12
months.
Detached SFR forecast:
Forecast for total SFR starts for 2014 is 34,000. This is level with 2013.
SFR starts will likely rise weakly for the rest of 2014, still reacting to the mid-2013 rise
in interest rates. They will begin to rise noticeably in 2015.
Subdivision final reports continued to rise mid-2012 as developers continue to sense a
return of home buyers is on the horizon.
The next peak in SFR starts will likely occur during the boomlet period of 2019-2020.
Multi-family housing construction trends:
26,546 multi-family housing starts took place in the six-month period ending May 2014.
This is a 31% increase from the same period one year earlier and the trend points to
continued increases. This amounts to a 6,354 increase in starts over that six-month period
ending one year earlier.
41,000 multi-family housing starts took place in 2013. This was up 39% from 2012.
For perspective, this cycles peak year in multi-family housing starts was 2004 with
61,543 starts. The lowest year was 2009 with 10,967 multi-family housing starts.
Multi-family housing forecast:
The forecast for total multi-family housing starts for all of 2014 is 53,000. This is a 30%
increase from 2013.
Multi-family housing starts will continue increasing at an annual pace of roughly 20%
throughout the rest of 2014 and into 2015.
The next peak year for multi-family housing starts is likely to be 2019.
Statistics related to California housing:
6,781,817 owner-occupied housing units existed in California in 2012, according to the
U.S. Census Bureau.
California population growth is increasing at a rate of 1.2% per year. Population growth
is trending upward over prior years.
15,421,100 people were employed in California in April 2014. This is down 173,000
employees, or 1.1% from the peak month of December 2007, according to the California
Employment Development Department (EDD).
The trough month for employment was January 2010, with 13,686,400 people employed
state-wide.
The residential for-let vacancy rate in 2012 was 5.2%. The not-for-let SFR vacancy rate
in 2012 was 1.7%.
Rental vacancies peaked in 1995 at 8.5% and are at 4.9% as of 2011. SFR vacancies
peaked in 2008 at 3% and are at 2.1% as of 2011, according to the Census.
Construction starts will continue to rise through 2018, at least. The pace of this rise is dependent
on several factors, discussed below.
Related articles:
Nobodys home: California residential vacancy rates
Golden state population trends
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
Homebuyer-occupant demand will ultimately determine whether and how fast construction starts
for SFRs and condos will continue to climb. Currently, speculator acquisitions at around 60% of
all ownership turnover (including foreclosures and resales) dominate Californias existing home
sales volume. This intervention will subside by mid- to late-2014.
However, builders rely upon buyer-occupants to support new home construction, culling out
speculators as buyers. Buyer-occupant demand to purchase a home in the first half of 2013 was
still weak. This is demonstrated by the continuing flat sales volume and mortgage origination
figures. Builders will continue to bide their time until sales volume figures for buyer-occupants
pick up.
Employment drives demand
When speculators interfere, home sales display a distorted picture of demand. However, builders
need to look to jobs data as the primary impetus for demand when they set the level of starts that
will likely sell. California is now steadily recovering jobs lost in the two years after December
2007. The annual pace of additional jobs is 1.6%, 0.4% over the number needed to supply jobs
for our population growth. But a full 3% annual pace is needed to get us back to full employment
and labor force participation comparable to December 2007 peak by around 2021. As of
February 2014, the Golden State had added 345,600 jobs over the prior 12 months.
At least 350,000 jobs must be added on a yearly basis for an 18-to-24-month period before jobs
will lift sales volume significantly. We finally began to see this rate of job additions at the end of
2013. However, the pace of job additions has decelerated over the past several months, showing
no signs of picking up again soon.
Related article:
Jobs move real estate
Obstacles facing SFR builders
Obstacles of concern to future construction starts include:
Speculators and syndicators dumping the fast building shadow inventory of their circa-
2012/2013 acquisitions back on the market;
Slipping rent rates in the suburbs due to competition by absentee owners for SFR tenants;
Rising mortgage rates, reducing homebuyer funding before completion;
Leased urban condo projects built but yet-to-be-sold due to the recession;
An upturn in foreclosures/REO resales and bankruptcies likely to re-occur after mortgage
rates begin a sustained rise, likely in 2015; and
Californias roughly 850,000n negative equity (underwater) homes, as of Q4 2013,
inhibiting turnover.
Until these factors are considered, builders cant take for granted that construction starts will pay
off. Expect starts to only modestly increase until these factors collectively improve, around 2017.
Related articles:
California Residential Vacancy Rates