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State’s Housing Production Drops 22 Percent in 2006, CBIA Announces

Production expected to stabilize this year, well below state’s housing needs

Housing production in California fell for the second year in a row in 2006, the California Building Industry Association has announced.

According to preliminary year-end data compiled by the Construction Industry Research Board, housing starts – as measured by building permits issued – totaled 163,449 during 2006, a 22 percent decrease from 2005. The total includes 106,953 single-family homes (down 31 percent from 2005) and 56,496 apartments and condominiums (up 5.3 percent from 2005).

For the month of December, single-family starts fell 12 percent from November and down 44 percent from December 2005. Multifamily starts – traditionally very volatile from month to month – rose 41 percent compared to November and increased 38 percent from December 2005. Total starts for the month were up eight percent from November and down 22 percent from December 2005.

CBIA Chief Economist Alan Nevin attributes the drop-off to a normalizing market, and the fact that builders have scaled back on production in order to concentrate on moving existing inventory. He said that new-home construction in California will continue leveling off until builders sell off their remaining inventory, a process that probably won’t be completed until early this year.

“The single-family building permit count came in decidedly weaker than we had anticipated when we prepared our revised mid-year 2006 projections,” Nevin said. “We had projected single-family permits at the 125,000-135,000 level. Three metropolitan areas accounted for the lion’s share of the declines: Riverside/San Bernardino, Sacramento and San Diego. The tail-off in the fourth quarter was unprecedented and relates to a concerted effort by developers to void their inventories by year end.”

Nevin added that the multifamily permit count was in line with his projections for 2006, however.

“The year ended five percent ahead of 2005’s 53,650 units. The strength of the condominium market in most major areas has proven to be stronger than anticipated, reflecting heightened activity in Los Angeles and the San Francisco/Oakland Bay Area,” he said.

In his 2007 Housing Forecast, Nevin forecasts that housing starts for single-family homes, condominiums, and apartments should total between 155,000 and 170,000 in 2007, keeping pace with 2006. Nevin noted that 2007 will still be a solid year for production.

“We are returning to a normal market,” Nevin said. “Producing 155,000 to 170,000 units will be more than any year from 1991 to 2001 and could exceed production levels from 1990 and 2002 as well.”

Nevin expects production will be especially low in the first quarter as builders finish the process of selling excess inventory, but believes that construction should pick up later in the year, but said builders will only be building enough to keep pace with demand.

“California’s housing production in 2007 will continue taking a breather as the market slowly returns to historically normal levels after the frenetic pace of the early part of the decade.” he said.

However, the lower production level is not good news for prospective homebuyers struggling to buy their first home as Nevin emphasized that the demand for the homes on the market today is not the same as the state’s chronic need for new housing to accommodate its growing population.

CBIA President and CEO Robert Rivinius added that we need to be building about 240,000 new homes, condos and apartments a year to meet the need for housing.

“Given California’s constant population growth of between 500,000 and 600,000 people a year, the state needs about 240,000 new homes and apartments every year just to keep pace. Unfortunately, we haven’t hit that level since the late 1980s, and unless major reforms are enacted at the state level to allow increased production, it does not appear that we will reach it anytime soon,” he warned.

Rivinius added that California needs new homes in all price ranges, and given the ever-rising fees and constraints on housing, it’s all but impossible to meet the need in the entry-level market, where the need’s the greatest. He said the industry would have a much better chance of meeting the statewide housing need if state and local barriers that restrain production and drive up costs were removed – especially ones that aggravate the acute shortage of land that’s zoned and ready to build new homes, condos, and apartments on.

The California Building Industry Association is a statewide trade association representing more than 6,700 businesses – homebuilders, remodelers, subcontractors, architects, engineers, designers, and other industry professionals. A recent study determined that homebuilding generates approximately $60 billion a year to the California economy and creates an estimated 526,000 jobs statewide. More information is available on the Association’s Web site, www.cbia.org

The Construction Industry Research Board (CIRB) is a nonprofit research center established in 1974 to provide statistical information on the California building and construction industry. More information is available on the CIRB Web site, www.cirbdata.com.

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