In ’07, Fewer Homes Expected to Be Built: Flat Prices Forecast

RISMEDIA, Jan. 8, 2007-(MCT)-The number of new houses, condos and apartments built in California will decline for a third consecutive year in 2007, the economist for a home building trade group forecast Thursday, while new home prices will soften or stay flat in most markets.

Alan Nevin, chief economist for the California Building Industry Association, forecast that 155,000 to 170,000 new housing units-including for-sale and rental housing-will be built statewide this year.

He called that a normal level of production, though at the low end it could represent a decrease of nearly 8% from 2006. Final figures are not available yet, but Nevin said housing production fell to about 168,000 units last year, after exceeding 200,000 in 2004 and 2005.

Both the California and national housing markets have been cooling since late 2005. Some experts say the slowdown began because prices had spiraled too high for many buyers to afford homes, and rising energy prices and mortgage interest rates finally dampened consumers' enthusiasm for buying homes.

"We don't expect any significant decline" in California housing production this year, Nevin said on Thursday, "unless of course there's some major economic shock." That might include a sudden, steep increase in interest rates or inflation.

In the nine-county Bay Area, Nevin forecast construction of 21,500 to 24,500 total units, split fairly evenly between single-family houses and multifamily units such as condos and apartments. It's a relatively small amount of new housing for a region with about seven million people and about 3.5 million jobs, he said, but constraints on the supply of developable land tend to hold down production.

New-home prices have been "relatively stable" in the Bay Area, Nevin wrote in his forecast, and "We foresee no changes occurring in that condition."

Economist Stephen Levy of the Center for Continuing Study of the California Economy in Palo Alto disagrees with the builders' opinion about price trends.

"Most economists I know, including me, think the housing price correction is in the beginning or middle stages, and do not expect a turnaround in prices anytime soon," he said. He added that a swift price correction-rather than a prolonged one-would benefit both home buyers and the local economy.

"Lower prices will bring more building back," he said.

The builders group concedes that few units built in 2007 will be affordable to most Bay Area residents, for which the group blames both the high fees levied on builders by municipalities, and government regulation that builders call excessive.

"The vast majority of this market can't afford what the industry is providing," Nevin said.

"What we really need to see in the highly urban areas is a major increase in attached, for-sale housing," meaning townhomes and condominiums.

But, he wrote in his forecast, "Many of the high-rise complexes touted for development in the urban cores will be put on hold or in mothballs until lenders and builders regain confidence in the market. The overbuilt conditions in places like Las Vegas and Miami will carry over to the Golden State."

Nonetheless, this will be a "perfectly tolerable year" for the home building industry, Nevin said. Home buyers, however, may not be so content, if his forecast proves accurate.

Nevin predicts that home prices will decline only in markets where there are still large supplies of new homes for sale now. But because builders have been offering generous incentives for about a year already-free upgrades and below-market-rate loan terms, for example — most builders' inventories have shrunk, and prices will flatten within a quarter or two, Nevin predicted.

He also predicted that land prices will drop in some markets, and so will builders' labor and material costs.

CBIA President Robert Rivinius, who spoke along with Nevin on the conference call Thursday, said his organization again this year will be working with state legislators on measures to promote housing construction, including changing some provisions of the California Environmental Quality Act.

The California builders group predicts that about 1.8 million housing units will be built nationwide in 2007. But the National Association of Home Builders, based in Washington, D.C., forecasts a less robust year for home builders, putting the number of
new units at about 1.56 million.

Distributed by McClatchy-Tribune Information Services.

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