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New Housing Breaking Ground… But Next Shortage Is In Sight


The California economy is in the middle of a moderate recovery and California housing numbers have improved during the early phases of the spring home buying season. Total home sales in Southern California, were up 2.8% year-over-year in March and had risen for seven out of the last eight months, lifting median home prices ever so slightly to a new six-month high, according to DataQuick. In this context, groundbreaking in the California apartment sector has already begun and the ownership housing market is beginning to stir. But this natural supply response is likely to be constrained in coastal urban cities, which are in love with grand transit-oriented visions of housing growth. Meanwhile, these same areas seem utterly hapless in coming to grips with pragmatic solutions for a likely housing supply crisis.

But what about the shadow supply of homes facing foreclosures or are already owned by banks? Isn’t it supposed to be enormous? Well, tight supply conditions already persist in transactional resale markets throughout the State, mortgage delinquencies in many communities are dropping fast, and distressed supply is declining in California. Don’t believe it? Just look at the stunning 49% plunge of distressed housing supply in Orange County, as reported by the Orange County Register a few days ago. There is not a shred of evidence of the fabled shadow supply getting unleashed after the robo-call settlement, at least not in California, where the shadow has indeed turned to be a mere shadow so far.

With fundamentals improving, there is evidence of groundbreaking in California’s new housing market. A twelve-month running series shows that California multi-family permits had grown 155% to almost 25,000 units by February this year from a low base of 9,200 in December 2009.  That multi-family growth was driven by coastal urban areas such as the Santa Clara, Orange, and Los Angeles Counties. It is no secret that the multi-family recovery in coastal California is based on strong apartment demand, and that these areas are experiencing rent growth and declining vacancies.

But is ownership building rising? A twelve-month running series shows that California single-family permits were still in the basement in February, particularly in the former affordability destinations such as the Inland Empire and Sacramento. There were, however, temperate improvements in single-family permits in Orange County, where they rose 62% from their low point in 2009, and in San Diego County, where they increased 35% from trough.

Moreover, it’s not much, but anecdotal evidence also suggests that more ground breaking is taking place in urban infill and suburban A-locations. For example, The New Home Company, will have a grand opening of their new Lambert Ranch in the hills above the Irvine Ranch, with 169 homes mostly in the $1 million range. Their CEO, Larry Webb, who has personally overseen extensive consumer research with previous buyers of the company’s sold out, million dollar Woodbury, mentioned that he is working on “10 more projects up and down the state in supply-constrained A locations with job growth.”

Furthermore, The Olson Company has just broken ground on a small lot detached project in the Westchester neighborhood of Los Angeles. They are planning to do more in El Segundo, Fountain Valley, and other – what they call “in-town” – urban locations close to job centers.

Up north, MeritageHomes has seen moderate increases in absorption this spring in their Antioch, Brentwood, and Gilroy locations, with some projects reaching or exceeding the gold standard of absorption in the 4 to 5 per month range. Josh Roden, VP of Acquisition with Meritage, says they are planning to open up two more projects in the area in late summer of this year and an additional two in the fall.

The cliché of buyers from coastal areas searching for affordable attractive homes in Contra Costa and Alameda Counties is resurfacing. An A-overflow location, which is technically located in the Stockton MSA, such as the Mountain House masterplan east of the Tri-valley area, is also seeing signs of improved absorption this spring – and ground breaking. Frawn Morgan with LDC Advisors, a private fiduciary for housing projects owned by CalPERS (such as Mountain House), says that new home sales picked up this spring in seven product lines in Mountain House, averaging over 3 sales per month per product line so far this year. Moreover, year to date sales are about double what they were in all of 2011.  She predicts another new product line is likely to open this summer and says that “we have seen a keen interest by private and public builders in our lot offerings in Mountain House and other good overflow locations in Northern California.”

These early signs of a recovery in California housing are encouraging. But there is trouble brewing on the supply side, especially in coastal communities.

Many infill developers are struggling to buy new land in coastal areas. Furthermore, multi-family permits are off their recent cycle peaks, not because of demand, but because of emerging supply constraints, which are being exasperated by retiring planners, cut backs in staffing, and the demise of the community redevelopment agencies.  If nothing is done soon, the best regional economies in California economies will soon face another housing crisis, which will again trigger affordability migrations either within the State or worse – out of it.

Already, California communities such as the City of Los Angeles register some of the worst overcrowding conditions in the nation despite improvements that occurred in the aftermath of the housing bubble. Improvements happened only because many foreclosed homes became rental units, representing an artificial supply windfall, which will melt away this year. Overcrowding is liable to shoot up again in California and the question is: Will Californians vote with their feet again to avoid the high cost of housing? That would be a shame – not for those who walk, but for California cities, who seem intent right now to miss an historical opportunity to maintain the market share of home and apartment building they have gained recently.

It’s true, we suddenly have a wealth of transit-oriented housing visions in California thanks to regional planning agencies. But these visions, which don’t seem to suffer from any sense of urgency, don’t address the immediate housing supply constraints in urban communities. Something else must be done and quickly. How about if communities actually get involved in building a land bank, going through their own real estate portfolio like any decent corporation would do, identifying and gathering economically obsolete and dilapidated properties in their communities, and collecting foreclosed properties that nobody wants – all to increase the supply of land for new housing? Although this might actually be a revenue generator for cash-strapped cities, I’m afraid it would be too pragmatic. Once quite naïve about American pragmatism, particularly of the John Dewey sort, I am being reminded that it has disappeared into the mist of history. Who benefits from this? First answer, California overflow locations, including the Inland Empire, second answer, “Phoenix, here we come again".

CATEGORY: Real Estate

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