Amid Boom, a Dip in State’s New Housing

Despite California’s flourishing economic and population gains, construction of new homes in the state has slowed sharply in recent months.

The unexpected slowdown since late summer has dashed hopes that the state will make headway this year in alleviating a worsening housing crunch, especially in the Bay Area but also in Orange and Los Angeles counties.

With fewer new houses and apartments being built than projected needs, analysts see continued upward pressure on home prices and rents, making it harder for more people to go out on their own or afford homes in places relatively close to their jobs.

Weaker home building also portends fewer new jobs ahead in the state’s construction industry, which has been a driving force in California’s robust economy. A wide range of businesses that rely on housing, from producers of stone and glass to furniture dealers, are likely to feel a pinch.

“It radically slowed down in August this year and caught us by surprise,” said Bill Davidson of Davidson Communities, a mid-size home builder in San Diego County. He said the principal culprit was land. “We hit the wall on [available] lots.”

A softening of new home prices in some areas also appears to have contributed to the slowdown, and builders have noticed more reluctance from home buyers and construction lenders lately because of recent interest rate hikes and uncertainties about the year 2000 computer bug.

“There’s a little bit of fence-sitting right now,” said Chris Chambers, a division president at Western Pacific Housing, a major statewide home builder based in El Segundo.

Scaling Back Expectations

For economists, the latest slowdown was perplexing. Given California’s sustained upsurge in employment, income and population, analysts had widely projected a 20% increase in new housing units this year, to 150,000, from a very low base of 125,000 in 1998. But it now appears that the increase will be only half that.

This year began with a burst of activity, but home building retreated in August and September, as it did nationwide. And the latest report shows October housing permits in California actually declined 6% from last year’s tepid levels.

“We’re back in the tank; it’s very disappointing,” said Ted Gibson, chief economist for California’s Finance Department.

Gibson and others worry that a dearth of new housing will hurt the state’s competitive advantage, as it leads to even higher home prices and limited supplies that make it harder to attract workers and businesses. Already, signs of that have emerged in San Francisco, where vacancy rates have dropped to less than 1% and housing prices have risen to the highest in the nation.

In fact, the recent building slowdown has been most pronounced in the Bay Area. Construction of single-family houses in San Diego and Orange counties also has fallen in recent months from last year.

The activity in Los Angeles County has been steadier. The county is on pace to add 14,700 housing units this year--up 25% from last year. But that’s still only one-fifth of peak levels of construction during the 1980s and one-third of the new units needed to keep pace with the county’s current population growth.

“You’ll have a lot of doubling up,” said Jack Kyser of the Los Angeles Economic Development Corp., a business-supported research group. Other residents, he said, will forgo shorter commutes and move to the Santa Clarita and Antelope valleys, where there has been more development of affordable homes. Or people may consider moving even farther out, to the Riverside-San Bernardino area, which continues to draw more builders with swaths of developable land that is scarce elsewhere.

Paying the Price

Developers in California have been under-building for the last few years, partly because they and lenders remained cautious after the state’s deep recession and housing collapse earlier in the decade that forced many builders and homeowners into bankruptcy. The companies that survived the downturn are now eager to build more, but are finding it far more costly and cumbersome to get permits amid bubbling anti-growth sentiments throughout the state.

“We have seen a very strong increase in demand for our capital from public builders,” said James Pugash, chief executive at Hearthstone, a San Francisco-based investment house that finances residential construction. But because of concerns of congestion, impact on schools and the environment, he said, many areas aren’t allowing land to get zoned for new housing.

Indeed, builders say they are paying double and in some cases triple the costs of a decade ago to clear the environmental and permitting hurdles, which typically take at least three years. And voters in a number of areas in the Bay Area and Southern California, including Ventura County, have placed limits on new development.

Mary McAboy, spokeswoman for Kaufman & Broad, California’s largest home builder, said the building slowdown isn’t because of diminished demand from buyers. As of late summer, she said, her company had a backlog of 2,630 houses that have yet to be delivered to buyers. That backlog, including its acquisition of Lewis Homes, was up 52% from last year.

Even so, sales of new homes have weakened a bit in some places as prices have soared. That may be giving builders some pause, as they don’t want to be caught with an oversupply of pricey houses. Economic growth nationally is widely expected to moderate next year.

As in other areas, developers in San Diego County have been building mostly higher-end, “executive” housing, said Aida Kaiser, managing director of the Meyers Group, a real estate consulting firm in Solano Beach. That’s pushed up the median price for a new home there to $300,000--up 15% from $260,000 a year ago. But sales have slowed recently.

“It’s an affordability issue,” she said. “Incomes haven’t risen as fast as prices.”

Still, builders agree that business should be fairly brisk next year. But given what’s in the pipeline and constraints in securing land and permits, no one is expecting a significant boost in production any time soon.

Ben Bartalotto, research director at the Construction Industry Research Board in Burbank, now sees 152,000 new units being built next year. That’s 14,000 fewer than he had projected earlier in the year. Even that may not be doable, he said.

“I’m a little uncertain based on our track record,” he said.