"No one is interested in doing loans to lose money," said Scott Laurie, chief executive of Olson Co., which builds single-family and town homes throughout Southern California.
Last year, Laurie said, he walked away from a town home project Olson was planning in northern Orange County, giving up a $1-million-plus deposit, because construction costs jumped and he wasn't confident potential buyers would pay a price that would make the deal pencil out.
According to John Burns Real Estate Consulting, costs for labor and materials rose 7.2% in June in Northern California compared with a year earlier, while home prices were essentially flat. In Southern California, costs rose 2.1% while prices increased 2%. In March, costs rose 4.1% while prices were flat.
Rick Palacios, director of research at John Burns, said developers are always cautious in a softening or declining market, fearful their projects won't get filled. On top of that, the beginning of 2018 was a relatively strong time for housing construction, making the comparison with this year especially tough.
On the upside, Palacios said construction costs have shown signs of stabilizing. And some builders say lower mortgage rates have lured more people back into the market. The average rate on a 30-year fixed mortgage was 3.6% this week, down from 4.94% in November, according to Freddie Mac. The drop would save $314 a month if the buyer put 20% down on a $500,000 house.
In Los Angeles, developers have also flooded the city with proposals to build dense projects through a new program that loosened zoning and streamlined approval near mass transit lines. But many of those projects haven't received approval or broken ground, and developers elsewhere still often face a lengthy approval process before they can build.
Even before sales slowed sharply over the last year, investors were focusing on deals with ready-to-build lots, or so-called entitled land, rather than projects that needed time-consuming government approvals to break ground. But now there are fewer lots ready to go and investors have grown even less optimistic, said Michael Marini, principal of developer Planet Home Living. "It's worse now," he said. "Everyone wants entitled land only."
Permits have fallen nationally too, by 6% in the first half of the year. Thornberg, of Beacon Economics, said the decline is worse in California because the market has slowed the most on the most expensive homes, which fill much of coastal California.
He said it's extremely difficult to build moderately priced housing in California, given high costs, tight environmental laws and neighborhood pushback that delays projects and drives up cost. He and other economists contend the main reason a 1,640-square-foot, 1920s-era house in Silver Lake sells for nearly $1.5 million is that for decades too few homes were built relative to population and job growth.
The slowdown in construction could shape some of the discussion about how to tackle the state's housing crisis. Richard Green, director of the USC Lusk Center for Real Estate, said government should make it more profitable for private companies to build moderately priced homes by reducing fees and allowing more homes on individual lots.