Homebuilders are starting to pull back on new construction projects. Which is the opposite of what is needed to ease the housing affordability crisis in California’s, say economists.
In the first half of 2019, builders were approved for only 51,178 new homes in California, almost 20% less than during the same time just a year earlier. This is the first year that California will see a reduction in the number of new homes being constructed since the housing crash in 2008.
The total number of permits granted in the Los Angeles-Orange County metro area decreased by 25%, according to data from the U.S. Census Bureau. The decrease in permits is a strong indication of a decline in future homes being built. Permits for single-family residences were down 18.5% in the region, while multifamily projects saw a 28.6% decline. Multi-family construction projects are typically the most volatile category of new construction and are the first to go when this is slowing.
“We are going in exactly the wrong direction,” said Christopher Thornberg, founding partner of Beacon Economics.
In certain areas of the Inland Empire Construction continues to boom. Beaumont is one of the fastest developing areas in IE. There is 15 new home site being constructed currently. There is a lot of new homes in Beaumont at the moment. While they are reasonably priced there will come a point shortly where the prices may need to be adjusted.
Economists, developers and trade groups all agree that the slowdown in permits is quite simple: Building new homes is becoming less profitable and currently, the margins are too small to take the risk.
Home prices and rents, to a lesser extent, are softening. Californians are finding it harder to make ends meet with the current housing costs and the wages most Californians receive. Sales of both existing and new homes have fallen, forcing some builders to reduce prices on developments already under construction.
Sales of homes during June, fell 8.8% in Southern California’s six counties. The median sales increase to 1.2% year over year to a price of $541,250.
With the increases seen in construction costs and most likely continuing to rise, profits on new homes are quickly shrinking. When it comes to the planning of new building projects, builders need to be very careful about what the costs will run and what future prices will be on new home sales. In many cases, there is too much risk and builder and their financial backing are not willing to take the risk.
Builders stated the high land costs, construction labor and materials, and government fees are the leading factors curbing new home construction. Additionally, tariffs on a large number of building products and appliances are also helping to drive up building costs. Over the last year, the potential profit on a large number of new construction projects has been reduced to the point it no longer makes sense for builders or their financiers to take the risk required to build these developments and keep their heads above water.