CNBC reported recently that new construction homes are not doing well, and cited a few reasons:
- Single-family housing starts fell more than 13 percent last month from a year earlier, according to the U.S. Census. Building permits, an indicator of future construction were down nearly 2 percent.
- This followed a sharp drop in homebuilder sentiment to the lowest level in more than three years, according to the National Association of Home Builders.
- “I definitely think we’re in a correction,” said John Burns, CEO of John Burns Real Estate Consulting. “Sales, according to our survey last month, were down 19 percent year over year. … I would call that a correction.”
From the perspective of Los Angeles real estate, let’s break it down:
- The starting of single-family housing construction: The issue with new construction in Los Angeles is two-fold. The first is the length of time to deal with the City. By way of example, I recently spoke with a City inspector in the Rancho Park/Cheviot Hills area. He said that day alone he had 19 inspections, plus calling more to cancel. He cited being short staffed, and even though they have since hired 14 new inspectors, there is still 10 weeks of training, and an additional three months of on the jobsite training. The second is cost. With the newly added linkage fees imposed by the City, plus all the additional permitting fees, cost of construction, labor, etc., it slows down production because developers only have a finite amount of money. The lower the cost of construction, the more properties they can build at one time.
- The sharp drop in homebuilder sentiment: Of course, home builders wouldn’t be happy with what’s going on. To the point mentioned above, Los Angeles is becoming less and less home building friendly. Regardless of political views, incentives to build in Los Angeles is dwindling and there are other options in other parts of the state and country. Keep in mind homebuilders are in the private sector. Their goal is to make a profit in a reasonable amount of time. With added delays and costs, in some cases it can be better to invest their money elsewhere. It also prevents new home builders from entering the market.
- Being in a correction: The data doesn’t lie, in the luxury market (where these single-family new builds are), it has slowed down. With inventory increasing, it gives buyers choices on what home they want to buy. With the latest fees that came into play from the City, many builders pushed to get their plans submitted before they would have to pay. Fast forward to now, most of the homes are either already built, or on the way. This doesn’t help if you are on the listing side, as this will result in increasing inventory.
For the lower price points, where first time home buyers dominate, it is still relatively competitive and independent of what is going on with new construction. Time will ultimately tell and to what will happen next. But for now, it appears we will see a major slowdown in new construction.
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