California building permits drop 29% as homebuying, rents cool

California permitting was 29% below the previous 12-month pace – and only 12 states had bigger drops.

California’s housing supply issues will never be cured because developers will slam the brakes on homebuilding when the market gets dicey.

As autumn began, pricey mortgages scared off house hunters and upset builders. Home prices dipped. Falling rents unnerved landlords.

And my trusty spreadsheet’s review of monthly building permit data from the Census Bureau found construction plans for ownership and rental units dramatically slowed.

California builders pulled permits for 7,168 housing units of all kinds in October. Yes, that’s No. 3 nationally and 6% of the nationwide total. (Psst! Texas was No. 1 at 22,882, and Florida was No. 2 at 15,519.)

But all this real estate uncertainty means California permitting was 29% below the previous 12-month pace – and only 12 states had bigger drops.

Nationwide, homebuilding permits fell 15% in the same period. Texas was up 4%, seventh-best, while Florida dropped 12%, 18th best.

Turnabout

It’s a stunning reversal. Home construction was on a roll before the Federal Reserve iced the real estate party – not to mention chilling much of the rest of the economy – with soaring interest rates.

In 2020-2012, developers saw the pandemic urges for larger living spaces and a building boom ensued.

Before October’s tumble, California’s permitting pace of the past year was 14% above the pre-pandemic 2015-19 average. That California building bump trailed the 38% national growth rate and ranked 41st among the states. Texas was 13th at 49% and Florida fifth at 67%.

Or look at how hot it was this way: 12,912 permits were filed in California in 2022’s first 10 months, the most activity in the state since 2005.

But as the year winds down, builders are clearly antsy about real estate economics.

High mortgage rates make buying unaffordable for many. A post-pandemic return to normalcy diminished the need for larger living spaces. And household formation has slowed dramatically this year.

Development dream

There’s a California dream that with some prodding and looser regulations, builders will construct enough homes to lower the state’s high housing costs.

It’s a tad delusional because developers – whether they’re building housing to buy or rent – are not exactly willing to take on huge financial risks for construction that would ultimately crush property values.

Look at how California builders were acting this autumn. October was the seventh-slowest month for permitting since 2015.

You can argue about the size of the longer-view housing shortage all you want. But builders are focused on short-term profitability.

And maybe they know the housing shortage isn’t as big as some think.

Consider that since 2015, California has permitted 858,387 units – that’s 8% of the U.S. total construction plans for ownership and rental housing.

But California’s population grew by only 651,130 in the same period – just 6% of US growth. And the past two years, the statewide population has shrunk.

Next, ponder the balance of new places to live vs. how many folks actually live here. Over eight years, California permitted 130 housing units for every 100 new residents. That surplus is hopefully making a relative dent in housing costs.

Compare that with the national ratio of 100 homes for every 100 added American. Texas and Florida are both losing ground, with just 60 units permitted for every new resident.

October may be just one month. But it’s a lesson in how quickly builders will pull back when conditions aren’t perfect.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com