Will Homebuilding Continue to Shine?

Exclusive Forecast Examines State Housing Outlook

The national and state economies continue to show signs of weakness as 2003 begins. One of the few bright spots, both in California and nationally, is the housing market, where low interest rates and strong demand have led to record production levels nationally and the highest level in more than a decade in California.

But will new home construction continue to shine in 2003? Despite the continued fallout from the implosion of the “dot.com” economy in Northern California, the threat of war in the Middle East, and possible tax increases, can California homebuilding continue to defy the economic trends?

According to an economic forecast prepared for CBIA by the National Association of Home Builders, the answer is yes. In this exclusive analysis for California Builder, NAHB’s Chief Economist David F. Seiders and Assistant Vice President Stan Duobinis forecast that housing production in the Golden State should continue to climb in 2003 and 2004.

But while NAHB forecasts significant increases in single-family construction for some sections of the state, it also expects housing starts in some high-growth regions will decrease somewhat this year.

California: Housing Remains a Bright Spot
The California economy remains sluggish. Job losses are still occurring, with total nonagricultural employment down by 15,800 in September 2002 from the August level. It is unlikely that job growth will return quickly. Since January 2001, the California economy has seen 82,500 jobs disappear. While a significant number, the losses are quite small compared to those experienced during the 1990-1991 downturn, when job losses totaled 521,600.

The downturn in tech-related industries has had significant effects on the California economy. The tech bust has hurt the northern portions of the state more than the southern areas, hitting San Jose the hardest. Tech-related industries have likely hit bottom, however, and rising defense spending is lending some support to portions of the state’s economy. The San Diego area, with its large military presence, is among the top performers in the state.

Declines in sales taxes and capital gains due to the stock market decline have had a huge impact on tax revenues for State government and tax increases have become a real possibility. During 2002, the decline in revenues caused government employment to stagnate. The last few years saw a large increase in State government employment, from 421,000 in January 1999 to 469,000 in December 2001. Since that point, State employment has increased by just 1,000.

Tourism still ailing
The attacks of September 11th have hurt the state’s large tourism industry. The travel industry has reported improved conditions but the levels are, in some cases, far short of previous peaks. While it may seem that airplanes are crowded to those who travel, that has occurred more due to the cutback in the number of scheduled flights rather than a surge in travel.

The turnaround in much of the California economy will depend on the pace of the rebound in business fixed investment, since this is critical to the state’s many high-tech businesses. Investment spending remains sluggish given the difficulty of raising capital, the lack of venture funding, the tightening of bank lending, and the general pessimism of the business community. A real turnaround is not expected until next year.

Further aggravating the situation is the slow pace of the global recovery, which has put a crimp on the state’s export trade. The recent West Coast port labor dispute only added to this problem. The level of exports, which finally posted a year-over-year increase in the second quarter of 2002, is now back to where it was in the mid-1990s in nominal dollars.

Housing a bright spot
One of the bright spots in the California economy is the housing market. Production of new housing units was expected to reach an estimated 144,090 in 2002, up by 3.8 percent from the level of 2001. Total housing starts are expected to reach 148,784 in 2003 and 153,661 in 2004. This is contrary to the situation nationally, where total housing starts are expected to decline by 3.4 percent this year. The single-family markets provided all of the increase in 2002, with growth of 7.9 percent, as multifamily starts declined by 9.8 percent. In 2003 and 2004, both segments of the housing market are expected to see growth, with single-family housing starts expected to total just over 117,000 units each year.

The state’s metropolitan areas will see radically different housing markets in 2003 and 2004, just as they did during the past year. In 2002, total housing starts increased by as much as 20.3 percent in the Riverside-San Bernardino area, while there was a 34.7 percent decrease in the San Francisco metropolitan area (San Francisco, San Mateo, and Marin counties.) This was the second year of large decreases in housing starts for the San Francisco area, and as a result, housing starts are now less than half their amount in 2000.

While most of the state’s metropolitan areas are expected to see growing housing markets during the next two years, that growth will be modest in most areas. Riverside stands as a clear exception.

The Inland Empire will remain as California’s largest housing market despite forecast declines in the level of production in 2003 and 2004. The area has the luxury of having a large amount of space available that can be used for building, something other areas of the state simply do not possess. This metropolitan area saw an increase in housing starts of approximately 50 percent during the past two years, so even a projected decrease in housing starts of just over 5 percent during the next two years will still leave housing starts higher than any time since the late 1980s.