The Future of California's Housing: Shortage Ahead? 20 comments
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I found some of the data in this article on new housing starts for California very interesting. I am going to just throw out some data, give a bit of analysis and let you decide on your guess for the future of California housing. Unless noted otherwise, the numbers are for total housing starts, single plus multifamily units.
- In 2008 California home builders started construction on 65,380 units, including just 33,048 single family homes.
- The record year for California home construction was 322,018 in 1963. Only 7 years of the last 50 have had housing starts below 100k, including a 5 year stretch in the mid 1990s when build rates ranged from 85k to 97k per year.
- During the 1982 recession when mortgage rates were 16% there were 85,656 home starts, 20k more than in 2008.
- In the early 1990s the U.S. government shut down the majority of the military bases in California, a major employer in the state. During the resulting recession, California home builders managed to build at least 84,656 (1993) units.
- The 20 year average for new home starts in California is 138,500. During the recent bubble year of 2002 to 2006 new home starts averaged 190,000 per year.
- California’s current population is approximately 38 million. In 1990 it was 29 million. The projected annual population growth rate is 1.5% compared to the U.S. average of 1.1%.
Analysis: I expect new home starts for 2009 to be even lower that 2008. 2010 will not be much better and with a 2 year lead time for the permitting process in California, by the end of 2010 there will be a housing shortage in the state. The state's population will increase by 1.5 million (think of all of Philadelphia looking for a place to live) and the economy will be recovering.
I have been stating for months that the first month when the median sale price does not decrease will set off a tremendous buying surge in California. Sales are already double the rates of late 2007 as many realize they will not see home prices again at these levels in California. With home builders building at less than half the historic rate, the dynamics of the California housing market will be interesting to watch.
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You have failed to mention: The very high unemployment rate in California, the California state government's massive debt and inability to make payments, the potential for the issuance of IOUs instead of actual state tax refunds, the fact that more people are leaving California than moving to California, the fact that 60% of Option ARMS (worth approx $750B in loans) of the entire nation are within California, the fact the the majority of these loans will recast within the next 2-3 years (unless they cast earlier due to negative ammortization caps) and the fact that even hard working individuals with six figure incomes and enough cash in hand to make a 20% down payment on a $1.2M down payment (and pre-qualified for such payment) still cannot currently justify the economic feasibility of purchasing a home (and that's after prices have already dropped almost 40% from their peak).
Ill informed and ill advised.
But great facts.
The main problem with the logic is that the author assumes that the starting point is equilibrium - that we're at the optimal level of supply right now, so any increase in population greater than the increase in supply will cause a shortfall.
But demand is a function of price as well as population growth, and with fewer than 20% of San Diego households able to afford an entry-level house, even with the 40% decline in prices, demand isn't going to be high. We're over-supplied right now for the current price levels. That inventory hang-over is what's causing the price decline.
Also - the author assumes that there is a 1:1 relationship between population and housing - and so neglects density.
Many of the new arrivals to California simply increase the density in existing housing, rather than consuming new housing. Think extra roommates, or putting grandma in the other bedroom.
Lack of affordability drives people into higher density living arrangements than elsewhere in the country.
True example - with my $140k salary, I would have a very nice house by myself in Philadelphia, but in Los Angeles I have roommates in a 2br apartment. So a 1.5% increase in population doesn't translate into a 1.5% increase in demand.
My final thought is this: the supply-demand match is good for a given price point. The current supply is too high relative to demand at the current price. If prices drop to reasonable levels (say, median house prices at 3-4x median incomes) where all the population that the author mentions will be able to participate in the market, then the excess supply will be consumed and the hiccup in housing starts will cause some tightening in the market.
But you can't say that population growth is going to drive up prices, when the median house price is already 10x the median income. Those extra people aren't going to be buying houses anyway.
It is very clear that you do not live in CA. Housing prices are still 30-50% over priced. CA is one of the most unfriendly business environments in the nation. CA already has huge unemployment issues and needs to raise more taxes out of both consumers and businesses to fight off its debt. CA will be the first state bailed out by the gov't.
Only a realtor, making a living off of home buyers, would tell individuals to buy CA real estate before all of the Alt-A loans reset in 2011-2012. FYI, there will be as many defaults on Alt-A loans as there will be on subprime in 2008-2009.
Sure there are going to be more defaults but don't kid yourself there are a lot more buyers out there now just waiting to get into the market.
The only thing that can help real estate prices is INFLATION and that appears to be on the horizon. However you should note it will only help in nominal and not real terms. Massive gov't spending appears to be the only tool left for most gov'ts to prevent their economies from going into a depression and that is inflationary. To quote Warren Buffet, we are living in an era where "cash is trash."
2009 will not be a happy year for the upscale California market no matte what happens.
They are not the same. Looking at only population growth is deceptive. People outside the state have NO IDEA of the magnitude of the transformation going on here. The State is becoming a Latin American country, only there is no national identity.
You are also assuming, like the author, that what's happened before will happen again. I'm not saying it won't, but you have no basis to say it will again. Ther net population is stagnant at best. Those that are coming in are fed into the "service" economy. They are gardeners and manual laborers. These people are not buying $700k houses, unless there are three families living in one. And the poster who commented on the manufacturing climate in California was dead on. There arew so many roadblocks to setting up a manufacturing business in California that most companies simply go elsewhere.
On Feb 08 06:02 PM Maryocon wrote:
> We ought to be very thankful it is not that easy to get a loan. Who
> needs 110% financing. That was the main reasons that we got into
> the economic fix we are in right now. The California real estate
> market was overheated for several years and would have slowed a lot
> sooner had not those crazy loans been around. The normal laws of
> supply and demand would have done it's job. Now the whole country
> is paying the price for those loans. It is normal after a deflationary
> period in the California housing market that prices stablize and
> then go up slowly. When it is cheaper to buy than it to rent, and
> in some places that is already true, the market will change and prices
> will increase. This whole cycle takes about 8 to 10 years.
The crazy realtors did not create the crazy loans. There was high demand during the bubble years, that had little to do with realtors. It was on the front page of every newspaper day after day. Realtors do not create demand, if they did we would not be seeing the market we have seen over the last several years where there has been no demand.
You are absolutly right about saying what happened in the past will happen in the future... I am not a fortune teller, I don't know if the sun will come up tomorrow, but I can read history and I can make intelligent assumption about the future, that is the best I can do.
There is a concept called "fiduciary duty" that is severly lacking in the real estate agent - buyer client relationship in California. High demand for a "crazy loan" is the result of an ill-informed buyer. Why in the world were there SO MANY ill informed buyers in California (where 60% of the "crazy loans" originated)?
I'd LOVE to hear of an example from 2004-2005 where a California agent or broker, who is paid a 3% commission on the SALES PRICE of a house, told their client that the house of their client's dreams was actually not economically within their client's reach (even though banks were then foaming at the mouth to provide said client a toxic mortgage that would enable said agent/broker to close a sale). Nope. Silence from the realtors and NAR then. "Don't worry ---- you can always refinance in 5 years---- housing prices in California will ALWAYS rise." Who hasn't heard that BS spewing from the mouths of the ill informed?
While the agents may not have created the "crazy loan", they certainly did not steer clients away from them either. And, there you have it. A breach of fiduciary duty BY OMISSION.
And it's happening again with the NAR clamoring for this god awful $15,000 tax credit for first time home buyers. This tax measure will simply inflate all of the prices in CA by $15K, thus prolonging the inevitable drop of housing prices to actual supply-demand market rates. I'm a first time home buyer with a healthy 6 figure down payment on hand in cash that could more than cover a 20-40% down payment. AND I'm pre qualified for a house in the range of $1.2M (which is laughable). You think it's a measly $15K that's preventing me from buying?
Think again.
I'm most certainly NOT going to put that $15K in the hands of flippers, speculators and ill-informed Sellers.
That's a big caveat. Prepare to get schooled on the effects of Alt-A and Option ARMs. If my memory serves me, more than 90% of those who are in such loan pay the minimum loan amount, which does not even cover interest. Thus, people are now subject to owing more than their original loan balance due to negative ammortization. And, in California, of the Option Arms that were recast in Dec. 2008 (which is still the calm before the storm in the world of Option ARM recasting), the notice of defaults for such loans was ALREADY At 28%!!! That's within just one month of recast.
Oh, baby, this is gonna make the subprime lending crisis look tame.
Time to start stashing your cash under the mattress.
Additionally, as other posters have pointed out, the vast majority of immigrants are incredibly poor, from Latin America and Asia. In Los Angeles county, there has been a net loss of non-immigrant/native population every year since 2005 (around 100,000 per year).
Given that we won't again be seeing the extraordinarily "creative" mortgage products that allowed shacks in South Central to sell for $600,000 or more, how on Earth is this impoverished immigrant population going to drive up housing, especially given that in many areas of town, housing is still 100-200% above its inflation-adjusted historic trend levels?
This post is pure rubbish, more of the same baseless fear mongering that helped create the bubble buying frenzy in the first place. California NEVER saw a bubble like this one, nor will it see one again in any of our lifetimes.
As UCLA's Anderson Forecast recently predicted, once we reach a bottom, we will see a protracted period of flat pricing. They were one of the few places to actually recognize the bubble while we were in it. Smart money would listen to them now and not dive in when prices likely still have far to fall.
On Feb 08 06:25 PM Aryamehr wrote:
> Inflation is the only hope of minimizing the downward spiral. Most
> developing countries use this tool very efficiently and I can see
> that happening in the US, even though it is not the best expedient.
> One should also realize that inflation does minimize price declines
> but only in nominial terms not real terms.
>
> 2009 will not be a happy year for the upscale California market no
> matte what happens.
The people leaving these comments are a bunch of sheep. An article in 2005 that said California house prices would crash would get a similar overwhelming number of comments stating the author was nuts and real estate goes up forever.
Here is the bottom line: I bought a San Diego condo in 2002 for $220,000 and sold in 2005 for $385,000. I rented for 3 and a half years and I just closed escrow last week (March 2009) on a 4 bedroom jewell on a 1/4 acre lot for $450,000. I put $16,000 down and my 30 yr fixed payment is $2,400 a month (includes prop tax, insurance and mort deduct). I couldn't rent this house for anything less than $2,500 a month and I just locked my $2,400 in for 30 years.
You can make alot of good financial decisions by doing the opposite of what the herd is currently doing. Right now, SoCal real estate is screaming, BUY BUY BUY, but only the sheperds hear the scream, the sheep won't buy until it is time to sell.
You can also see from the chart that the subprime resets are winding down, so we are actually in the calm between storms, so to speak.
This is all very predictable and easy to understand if you look at the data. Of course, the NAR and friends know this and are taking advantage of the relative calm in the market to reel in as many buyers as they can for one last hurrah before the mess begins. Alt-A & Option ARMs will affect the middle class, and will make the subprime mess look like the good old days.
That's when places like south Orange County, where I live, becomes affordable and buying begins to make sense again.
On Feb 10 04:21 AM law girl wrote:
> Prepare to get schooled on the effects of Alt-A and Option ARMs. If my memory serves me, more than 90% of those who are in such loan pay the minimum loan amount, which does not even cover interest.
> Oh, baby, this is gonna make the subprime lending crisis look tame.