Chuck Ponzi January 27th, 2006

If you haven’t had a moment to checkout the new numbers on GDP that came out today, you really ought to take a look.

The LA Times ran an article today about titled State’s Housing Starts Fall for First Time in 10 Years. It gives an interesting, although fallacious argument to the concerns over housing starts falling.

In defence of the writer, he is just quoting some of the local housing experts, but it is pretty clear by reading between the lines that something else is going on.

Residential permits totaled 207,200 last year, the second-highest level in 16 years but 3% below 2004’s rate, the California Building Industry Assn. said. The trade group blamed the decline on strict regulations that limited construction.The trade group said housing production could drop by as much as 11% this year — potentially bad news for a California economy that has depended on construction as its leading job creator. A construction slowdown also could worsen the state’s housing shortage, said Alan Nevin, the association’s chief economist. He said California needed as many as 250,000 new housing units every year to meet potential demand.”Housing is definitely taking a breather,” Nevin said. He expects permits to fall to between 185,000 and 205,000 in 2006.By some estimates, more than 40% of all new jobs in California since 2001 were in construction or real estate-related fields.

In one of the hottest years for real estate PRICING, fewer homes were being built. This is most assuredly bad news for them. California has relied on construction to literally build them out of a recession. Without these jobs, the state’s economy will look much worse.

With all of the discussion of housing shortfalls over the past few years, I would expect to see far more people living in cardboard boxes than I have been seeing. How do we know that these numbers are real? Could they simply be serving to excite the public into the “buy now or forever priced out” mantra? They would never do that, would they?

Still, 2005 was the second time since 1989 that California’s housing production
exceeded 200,000 units.

Few homes means fewer real estate agents, fewer loan consultants, fewer builders staff as well. Construction won’t be the worst hit. It can and will happen everywhere else.

Nevin and members of his trade group contend that builders would gladly construct more homes if state and local zoning and building codes were less onerous. However, rising home prices may be starting to hamper the public’s ability to buy. The number of homes sold in Southern California was flat last year, the first year sales hadn’t increased since 1996, according to research firm DataQuick Information Systems. At the same time, home prices rose 16.5%.

I’m so glad that home builders are looking out for our best interests. Surely they would just as gladly lower prices so that more people can afford these homes, right?

Don’t worry too much about their ability to make money. When I looked at a house in SCV back in 2000, the original advertised prices for the homes were “Starting in the $190K’s” When visiting the sales office 2 months later to inquire about the first homes being built, the starting prices had been pasted over with a placard that read “Starting in the high $200’s”. I inquired and found that the lowest priced model was $275K. So, if the company figured they could make money selling at 190, I am certain that they were making an additional 40% by charging that much more. BTW, 2 years later, they were selling those same homes for $450K. Not a bad business to be in. Hardly being picked on.

Single-family housing construction, which accounts for the bulk of the state’s new housing activity, rose 2.2% statewide to 154,816. While most metropolitan regions showed gains, the biggest jumps were in the booming San Joaquin Valley.Back in 1995, the last time construction declined, the slowdown coincided with a housing market downturn that was caused in part by overbuilding of new homes.From 1992 to 1996, fewer than 100,000 homes a year went up across the state.

We should really start to question that need of 250K new houses. Is that really a need? How did they come to that number.

Another theory:

Population is most definitely growing in Southern California. The numbers do not lie. But, there is something more important that that. The housing density of households is likely increasing.

Yes, many of the state’s immigrants are ethnic minorities which historically have higher household density than the standard run-of-the-mill Californians.

Couple this with speculative buying by investors (up to 25% or more in past years) and it appears you have a housing shortage. We have no housing shortage (as the California Builders Association would love you to think) we have an affordable housing shortage. Thanks, in part, to the fear mongering you hear from the CBA.

In the end, the California Builders are serving their own best interests. However, overbuilding is overbuilding. Luckily for builders, unlike in the 90’s they are not left holding the speculative bag this time. Many builders learned through hard experience that spec-built homes are a dangerous way to do business and required pre-sales. In the end, they may fare much better this upcoming downturn than in the previous cycle.

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