Mid-Year Housing Forecast

Housing production falling short of earlier forecasts

A special report by Alan Nevin, CBIA Chief Economist

Due to the greater-than-expected volume of foreclosures and short sales, the forecast for single-family new-home production has been substantially modified from CBIA’s January forecast. The forecast now calls for just 38,250 single-family permits to be issued this year, with the four areas of Sacramento, San Joaquin Valley, Riverside and San Bernardino County continuing to experience the heaviest rates of decline. Single-family housing production in 2008 will be a 75 percent decline from the peak year of 2005.

The multifamily sector will produce 10,000 units less than had been forecast at the beginning of the year, but it is now apparent that condominium production throughout the state has come to a standstill, both in the urban cores and in the suburbs. For all of 2008, the projected total output of the California multifamily industry will be 34,100 units. Total production for the year is now forecast at 72,350 units, which would be a decline of 66 percent from the peak year of 2004.

Production is expected to be the lowest since records began being kept in 1954, and in all probability will be at the lowest level since World War II.

The downturn has caused a sharp decline in construction-related employment. During the past two years, the state reported a loss of 181,400 construction, finance and insurance jobs. 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 industry in the U.S.

The number of foreclosures on the market should decline substantially by the end of 2008, but prices will remain depressed until the market reaches equilibrium again sometime in 2009. Next year should see gradually rising resales (albeit mostly distressed housing), but that is an indication that the buyers are gradually regaining faith in the housing market and households that could previously not afford to buy a home can now once again qualify for a loan. But until the resale market recovers and prices stabilize, it will be difficult to entice developers back into the homebuilding business. Experience has shown that it is far more financially sound to sit with vacant lots than with completed homes that have no buyers in sight.

Despite downturn, overall demographics remain strong

Demographics is one of the blessings for California because of its long-term implications for housing demand and labor supply. Recently, the California Department of Finance released its 2008 population statistics. During the past year, the state gained almost a half-million persons — a pace ahead of each of the prior three years. Based on this progression, California will reach a population of 40 million by 2012 — only four years from now.

Until the massive decline of the construction and real estate finance industries, the state of California was routinely gaining more than 250,000 jobs annually. From May 2006 to May 2007, the state gained 192,100 jobs and maintained an unemployment rate of 5.2 percent.

The past year, the construction-related losses were so significant that it had the effect of dragging down the entire California economy. In the past year, the state lost 120,300 construction-related jobs, a loss that caused total employment to dip by 17,100 jobs — the first California downturn in seven years.

The job declines related to construction have far more depth than the basic numbers shown here as the multiplier effect of the construction industry is higher than any other industry in the U.S. Thus, the multiplier effect of a sagging construction industry affects all industries, including retail and services, and government. Local governments are particularly affected by the construction downturn because of their heavy reliance on development fees and rising retail and property taxes.

We want to note that most of California’s other basic industries continue to evidence strength, including tourism, manufacturing, import/export and the bio-com/telecom sectors.

Construction output and residential housing

From its peak in 2005, residential construction has declined by 50 percent in California. Single-family housing — the traditional backbone of the industry — has seen a decline from 155,322 units in 2005 to 68,409 in 2007.

Multifamily permits have not been as severely affected because that category includes both condominiums and rental apartments. Rental apartments have increased their percentage of multi-family new construction in the past three years, while condominium construction has ebbed.

Similarly, the dollar value of permits for residential housing has declined from $45 billion to $22 billion from 2005 through 2007.

Most areas in California suffered major declines in single-family construction, but two-thirds of all permit declines were in four areas: Sacramento, the San Joaquin Valley, Riverside, and San Bernardino counties. Those four areas produced almost 60,000 fewer homes in 2007 than in 2005.

Multifamily permits fell by only 16.8 percent in the 2005-2007 period, with most areas experiencing comparable downturns.

The residential housing business has suffered throughout the United States, but nowhere more than in California. The combination of the subprime financial disaster and, related to it, the massive increase in foreclosures and short sales, has created a situation where the housing market — new and resale — has not been able to operate in a normal manner.

The effect of the financial mishaps and foreclosures has caused home prices to decline throughout California, but mostly in those four areas that have now experienced massive declines in new construction. It is apparent that the residential construction industry cannot compete with the foreclosure/short sale market, particularly in an environment where homebuyers have not yet been convinced that the bottom of the market is at hand. 

Modified outlook

It is likely that most of the foreclosure activity will ebb by the end of 2008 as owners of those homes have long ago recognized that the imputed equity in their homes has been lost. In most cases, these buyers had little if any down payments on their homes and therefore their actual losses are minimal, but no less painful. Further, it is now known that a major segment of the buyers were investors, often masquerading as owner-occupants for purposes of acquiring favorable financing.

We are of the opinion that the foreclosure market will decline substantially by the end of 2008, but prices will remain depressed until the market reaches equilibrium again sometime in 2009. In many markets today, and particularly those four markets with the most devastating decline in construction, as many as two-thirds of the resales are foreclosures or short sales.

To view the complete mid-year forecast, visit www.cabuilder.com.