The rising trend in California construction starts

SFR and apartment/condo construction starts increased over the last six months compared to the same period last year. The trend in construction starts continues to give mixed signals with September 2012 numbers. SFR starts decreased by 10% from August 2012 to 2,239 starts. However, apartment/condo starts increased by 25% from the prior month to 3,101 starts.

Chart 1

This chart illustrates the number of California residential construction starts during semi-annual six-month periods ending in March and September.

Chart updated 11/2/2012

 Six-month period ending September 2012 March 2012 September 2011
SFR Starts
Apt/Condo Starts

Chart 2

Chart updated 2/27/2012

2012 (Forecast)
2010 2005
SFR Starts
25,526 155,322
Apt/Condo Starts

Data courtesy of Construction Industry Research Board and the U.S. Census

Forecasts in January. During the year, they are adjusted periodically. Figures are based on current new homes sales trends, actual construction starts and current government policies.

Detached single family residential construction trends in California:

  • 14,464 single family residence (SFR) starts took place in the six-month period ending September 2012. This is up 24% from the same period one year earlier.
  • The trend in the number of SFR starts is rising. Still, SFR starts are characterized by volatile rises and falls from month to month.
  • 21,538 SFR starts took place during 2011. This is down 16% from 2010.
  • The recent peak year in SFR starts was 2005, with 155,322 starts. Current annual rate of starts is roughly 25,000.

Detached single family residence forecast:

  • The forecast for total SFR starts in 2012 by the Construction Industry Research Board (CIRB) is 25,400. This is up 18% from 2011.
  • The forecast for total SFR starts in 2012 remains 21,000. This is down 2% from 2011. We anticipate a fall slowdown in response to a slowing global economy. Since builders correct slowly, this slowdown will likely extend into 2013.
  • The trough year for SFR starts following the Great Recession will likely be 2011.
  • The next peak in SFR starts is likely to occur during 2018-2020.

Apartment/condo construction trends

  • 15,158 apartment/condo starts took place in the six-month period ending September 2012. This is an 18% increase from the same period one year earlier.
  • Today, apartment/condo starts continue to steadily increase by 20%each year. This follows trends set after the last trough which ended mid-2009.Monthly apartment/condo starts in 2012 have been characterized by abrupt rises and falls from month to month.
  • 25,554 apartment/condo starts took place in 2011. This is up 33% from 2010.
  • The most recent peak year in apartment/condo starts was 2004 with 61,543 starts. The lowest year was 2009 with 10,967 apartment/condo starts.

Apartment/condo forecast:

  • The CIRB forecast for apartment/condo starts in 2012 is 31,600. This is up 23% from 2011.
  • The forecast for total apartment/condo starts in 2012 is 27,500. This would be a 7% increase from 2011. Our forecast was set in November 2011 and is below the current 20% increase forecast by the CIRB.
  • The next peak year for apartment/condo starts is likely to be 2018 or2019.

Statistics related to California housing:

  • 7,035,371 owner-occupied housing units existed in California in 2010, according to the U.S. Census Bureau (the Census).
  • California population growth is increasing at a rate of 1.2% per year. Population growth is trending upward over prior years.
  • 14,239,500people were employed in California in August 2012. This isdown roughly 1.1 million employees, or 7% 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 rental vacancy rate in 2011 was 6.1%. The SFR vacancy rate in 2011 was 2.1%.
  • Rental vacancies peaked in 1995 at 8.5%. SFR vacancies peaked in 2008 at 3%, 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.

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 factors can produce a prediction of future construction trends.

End user demand drives sales

Homebuyer-occupant demand will ultimately determine whether and how fast construction starts will continue to climb. Currently, speculators dominate California’s existing home sales.

However, builders rely upon end users to support new home construction. Buyer-occupant demand to purchase a home in the second half of 2012 is still weak. This is demonstrated by low sales volume. Builders will continue to bide their time until sales pick up.

Employment drives demand

When speculators interfere, home sales display a distorted picture of demand. However, builders can look to jobs data to determine the real source of demand. California is now steadily recovering jobs lost after December 2007. As of August 2012, the Golden State had added a notable 276,100 jobs over the prior year.

This rate of job additions must increase to at least 350,000 for a two-year period before jobs will begin lifting sales volume. January year-over-year jobs data gives the best gauge of when California will be in full recovery.

Builder obstacles

Future obstacles of concern to construction include:

  • speculators dumping their circa-2012 acquisitions back on the market;
  • an upturn in foreclosures/REO resales occurring after the Fed raises rates, likely in 2015; and
  • California’s roughly 2,000,000 negative equity (underwater) homes.

Until all of the above factors are considered, builders can’t take for granted that construction starts will pay off. Therefore, expect starts to only modestly increase until these factors collectively improve, around 2017.


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