Housing

Bubble watch: Southern California builders sluggish development plans



Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Southern California developers have cooled their aggressive homebuilding plans, cutting the pace of permitting by one-fifth after the fastest start to the year since 2007.

Source: My trusty spreadsheet looked at building permit data — notably the pace of monthly approvals — for Los Angeles, Orange, Riverside and San Bernardino counties from the Census Bureau and compiled by the St. Louis Fed. Getting government permit approval is one of the final steps before home construction starts.

Topline

The tale begins with a surprisingly robust homebuying market in 2021. It was the best-selling year for Southern California new homes since 2007 and that success nudged builders to ramp up planning efforts.

In 2022’s first half, new single-family houses were approved at a 2,240-a-month pace. It was the busiest six months for homebuilding plans since 2007. That permitting boom was 15% above 2021’s start and 42% above the 2015-19 average.

But this spring, the market took a swift, dark turn. Mortgage rates rose quickly, making the typically expensive new homes even more unaffordable. And economic uncertainty — especially about housing’s future — turned off many house hunters. Overall Southern California homebuying from June to August was the slowest on record.

So local builders pulled permits in July and August at a 1,780 monthly pace — 21% slower than the year’s fast start.

The dissection

The Inland Empire — homebuilding’s regional hotbed — had the summer’s biggest cooling. July and August permitting ran 32% below the first-half pace.

In Los Angeles and Orange County, the summer started with permits made 5% under the first-half pace. And in the rest of California, permits slowed 9%.

Yet there was no summer cooling for Southern California developers of multifamily projects. That’s primarily apartments and some townhomes built for ownership.

Why? It’s been a slow year.

In 2022’s first half, the region’s multifamily permits ran 1,910-a-month — 1% above 2021 and 10% below 2015-19. The pace stayed the same for July and August.

In L.A.-Orange County, the summer started with 5% less permits vs. the first-half pace. Yes, the Inland Empire jumped 38% — but it’s a tiny multifamily market. And the rest of California fell 6% from 2022’s start.

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … THREE BUBBLES!

Throttling new-home production is no grand surprise. And two months is only a hint, not a full trend. But maybe we won’t suffer overbuilding in this cycle.



Source link