The rising trend in California construction starts

Single family residential (SFR) and apartment/condo construction starts increased over the last six months compared to the same period last year. Likewise, the single month of December 2012 experienced an increase in both types of construction starts. This is typical for December, as builders rush to record their starts before the year ends. SFR starts increased by 12% from November 2012 to 2,520 starts. Apartment/condo starts nearly doubled to 3,497 starts.

2012 ended with 27,000 SFR starts, a 25% increase from 2011. Apartment/condo starts increased 16% to 30,000 starts. Expect a modest increase in SFR starts in 2013 and a strong rise in the number of apartment/condo starts.

Chart 1

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

Chart updated 2/6/2013

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Chart 2

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Chart updated 2/6/2013

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Forecasts are made 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:

  • 14,539 single family residential (SFR) starts took place in the six-month period ending December 2012. This is up 44% 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.
  • 27,000 SFR starts took place in 2012. This is up 25% from 2011, the trough year for SFR starts.
  • The recent peak year in SFR starts was 2005, with 155,322 starts.
  • Final reports issued for subdivisions by the California Department of Real Estate (DRE) have remained consistent over the past three years.

Detached SFR forecast:

  • Forecast for total SFR starts in 2013 is 30,000. This is up 11% from 2012.
  • SFR starts will continue increasing in 2014-15, gaining momentum each year as lenders become more confident and more willing to lend to builders.
  • As SFR starts increase, subdivision creation will also rise.
  • SFR starts may slow in 2016-2017 following the rise in mortgage rates which will occur in 2015-16.
  • The next peak in SFR starts is likely to occur during 2018-2020.

Apartment/condo construction trends:

  • 16,033 apartment/condo starts took place in the six-month period ending December 2012. This is a 17% 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.
  • 30,000 apartment/condo starts took place in 2012. This is up 17% from 2011.
  • 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:

  • Forecast for total apartment/condo starts in 2013 is 40,000. This is a 33% increase from 2012.
  • Apartment/condo starts will continue increasing at an annual pace of roughly 30% through 2014-15.
  • The next peak year for apartment/condo starts is likely to be 2018 or 2019.

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.
  • 14,515,600 people were employed in California in December 2012. This is down roughly 830,000 employees, or 6% 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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