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California home builders are pulling back, deflating hopes for housing relief

Andrew Khouri, Los Angeles Times on

Published in Business News

Home builders are pulling back from new construction, the opposite of what economists say is needed to ease California's housing affordability crisis.

In the first six months of 2019, builders gained approval for 51,178 new homes in California, nearly 20% fewer than the same period a year earlier. That puts the state on track for the first meaningful annual decline since the recession.

In the Los Angeles-Orange County metro area, total permits -- an indication of future construction -- fell by 25%, according to data from the U.S. Census Bureau. Single-family permits dropped 18.5% in the region, while those for multifamily projects such as apartment buildings -- a category in which activity tends to be more volatile -- fell 28.6%.

"We are going in exactly the wrong direction," said Christopher Thornberg, founding partner of Beacon Economics.

Economists, developers and trade groups said the slowdown in permits has a simple explanation: It's become harder to make money building homes.

Home prices and, to a lesser extent, rents, have softened as Californians find it harder to stretch their dollars and balk at stratospheric price points. Sales of existing and new homes have fallen, forcing some builders to cut prices on developments already underway.

 

In June, sales fell 8.8% in Southern California's six counties. The median sales price was $541,250, up just 1.2% from a year earlier.

At the same time, construction costs are high and, by some measures, still rising. For new projects, builders said, there's a limit to how low they can set prices or rents to stoke demand.

Builders cited the high costs for land, labor, materials and government fees, as well as tariffs on myriad building products and appliances. Over the last year, they said, the potential profit on many new projects has shrunk to the point at which it doesn't make sense for builders or their financiers to take the risk.

"You can't wish yourself into high rents and make a project feasible," said Kevin Farrell, chief operating officer at apartment developer Century West Partners.

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