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What Does California Housing Look Like In A Post-COVID World?

William Fulton on
Mar 22, 2020

So on top of everything else, California now has to try to build lots of housing in the face of COVID-19. Good luck.

It’s impossible to estimate how many people will be affected by the virus directly. But everybody will be affected by the economic fallout from the situation. Basically, there’s no economy at all right now. So how are is the state going to make progress on the housing situation – especially since housing starts went down last year, when the economy was really good?

At least three good things are happening now. The first one is that Gov. Newsom and big-city mayors, now on a war footing, are finally moving aggressively to house the homeless wherever they can. That’s not new construction but at least the homeless are moving inside. The second – a short-term move – is the temporary prohibition on evictions in many places. And the third is the fact that – so far at least – construction of projects under way is continuing. That will increase the housing supply.

But those are short-term moves. What about the long term?

Throughout the entire housing crisis, local governments have rightly shouldered a lot of blame for the long-term problem, having discouraged housing construction for the last 30 years with a wide variety of slow-growth policies. There’s some evidence that this is turning around, especially in the Bay Area, where the YIMBY movement is strongest. But there’s still strong evidence of ongoing resistance to more housing, especially in Southern California. Our report this week on an appellate court ruling on a mixed-use project in the notoriously slow-growth city of Agoura Hills is a good example.

Yet we’re quickly getting to the point where all the approvals in the world won’t make much difference, because the market’s not going to build anything anytime soon – much less the half-million units per year that Gov. Newsom was talking about during the campaign in 2018.

The history of California housing construction isn’t encouraging. The chart below is derived from 56 years of data from the Department of Finance. It shows at least four important facts:

  1. California housing starts have only twice hit 300,000 per year since 1963.
  2. Housing starts are choppy – they rarely stay at a high level for several years in a row.
  3. Even during strong economy from 2017 to 2019, housing starts were still stuck in the basement.
  4. Housing starts tank in a recession – just look at 1982, 1991, and 2009.

There are many reasons that housing construction plays out this way. Housing – and real estate development generally – is vulnerable to a wide variety of external factors. These include the price of construction materials, the availability of construction workers, and the ability to maintain financing during hard times.

The cost of construction materials fluctuates on a worldwide basis – materials can be cheap or expensive at any given time. Everybody recognizes that there aren’t enough construction workers in California to meet Newsom’s target. Therefore construction workers are expensive, and they are much more likely – if they have the option – to work in inland locations near where they live than in the expensive coastal areas where housing is most needed. And, of course, developers often lose their financing – and their property – in a recession.

It’s also important to understand that lower housing prices – which theoretically make housing more affordable to people who need it – don’t necessarily mean more construction. In fact, in California it’s often the opposite: Housing construction increases when prices are high. That’s because the cost of entitlements is so high that developers can’t make projects pencil out when prices are low. It’s also true that in a recession more prospective renters and homebuyers are in dire financial straits and therefore can’t get good credit or quality for mortgages.

This is exactly what happened in the early 2000s. Prices went through the roof – and housing starts reached their highest level since the 1980s. When the recession came, prices plummeted – but so did housing starts.

So even after the COVID crisis passes, the lingering economic effects are likely to stifle housing construction – no matter how much housing local governments approve in the meantime.

One other long-term pattern in California is worth mentioning: Since the first real estate runup in the ‘70s, what we’ve seen several times is a rapid climb in housing prices followed by a very long period of levelling off. This occurred after the recession of 1990-91 and again after the recession of 2008 (prices actually dropped but were more or less stagnant for close to a decade). If history is any guide, this levelling off is likely to happen again. Coming out of the COVID recession, that should allow incomes to catch up to housing prices, as occurred in the 1990s – thus making housing more affordable to more people. That’s not 3.5 million units in six years, but it’s a start.

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