How do California homebuilding booms differ from busts?

“Numerology” tries to find reality within various measurements of economic and real estate trends.

Buzz: So, what might it take to get California homebuilders to ramp up their construction efforts?

Source: My trusty spreadsheet looked at California building permits for single-family homes dating back to 1990 and compared those patterns with home-selling data from the California Association of Realtors and some other economic stats.

Fuzzy math: It’s easy for the industry to blame explain a lethargic construction pace on bureaucratic difficulties in planning and executing homebuilding in the state. It’s not that their complaints aren’t true, but builders also can be picky about when they choose to build.

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When you review 34 years of real estate activity by slicing the months into thirds based on 12-month changes in California permits, you find construction plans grew annually at an average 27% pace in building booms (the top third) and declined 25% annually in construction busts (the bottom third).

Or, looking at those periods in terms of month average permits: 6,150 permits in booms vs. 5,030 in busts – that’s 1,120 extra plans for new residences or 22% more.

Details

How do those California booms and busts compare with other yardsticks gauging real estate and the broader economy?

Well, it seems builders like overall homebuying momentum.

Sales of California’s existing single-family homes grew 6% a year on average in homebuilding booms vs. dropping at a 5% pace in construction busts.

And those old homes go swiftly. Days on the market, a metric of selling speed, dropped 15% a year during booms vs. expanding by 21% in busts.

Like any seller, appreciation is appreciated by builders. California’s median selling prices of those single-family houses rose annually at an 11% clip in booms while dropping 3% in busts.

Limited competition also appears to be appealing. Inventory of California’s single-family homes for sale dropped 16% annually on average in booms vs. growing 24% in busts.

Builders also appreciate good vibes. Consider two national confidence yardsticks from the Conference Board.

During California booms, 4.7% of US consumers surveyed said they were planning to buy a home vs. 3.8% in busts. And overall US consumer confidence is 12% higher in the boom times.

Of course, builders also seek steady, growing paychecks.

California job growth averages 1.6% in booms vs. 0.2% in busts. And the statewide unemployment rate typically falls by 0.4 percentage points in booms vs. rising 0.7 points in busts.

Curiously, financing costs don’t seem to be a factor. Since 1990, mortgage rates dropped by tiny amounts in both booms and busts.

Bottom line

Builders don’t want to get stuck with gobs of unsold inventory – as was the case in the early 1990s and mid-2000s.

So increasingly, they’ll build swiftly only when economic conditions are nearly perfect.

On one hand, that’s understandable as they’re profit-seeking entities.

On the other hand, that thriftiness doesn’t help shrink the state’s housing shortage.

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Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

Source: Orange County Register