Written by 6:39 pm Wealth Building Views: [tptn_views]

California’s housing slump spells trouble because the state is about to get much more pricey

In California’s real estate market, a slowdown in home construction is sending ripples of concern through the industry.

With fewer homes being built, experts warn that the already sky-high housing prices could skyrocket further resulting from limited supply, exacerbating the state’s affordability crisis.

Ken Kahan, the president of California Landmark Group, known for his luxury apartment complexes in Los Angeles neighborhoods like Palms and Silver Lake, is feeling the pinch.

Despite his expertise, Kahan admits that recent times have been tough. “We have pulled back,” he told the Los Angeles Times, citing unfavorable metrics which have made business increasingly difficult.

Developers across California and the nation are facing similar hurdles.

Rising labor and material costs, coupled with stringent local regulations, are making it increasingly difficult for developers to show a profit on recent projects.

However, the most important blow comes from the stagnant — and soaring — cost of borrowing.

With rates of interest on the rise, developers are shelling out extra money to finance their projects, making fewer ventures financially viable.

Preliminary data from the US Census Bureau reveals a stark decline in constructing permits for brand new homes nationwide, with California experiencing a 7% drop in 2023 alone.

Construction in California has dramatically slowed. Image’in – stock.adobe.com

Single-family homes, typically on the market, and multifamily units, predominantly rentals, are each seeing decreases, signaling a worrying trend for the housing market.

Dan Dunmoyer, president of the California Building Industry Assn., attributes much of the decline to cautiousness amongst for-sale home builders, who anticipated a market downturn amid soaring mortgage rates in 2022. However, the anticipated drop in demand didn’t materialize, leaving builders scrambling to catch up.

“Builders type of woke up and realized ‘Oh, it’s just us [selling homes],’” Dunmoyer told the outlet. “But we don’t activate a dime.”

A California construction site as activity slows. JOSH UTLEY – stock.adobe.com

While single-family home construction shows signs of recovery in California, multifamily permits proceed to dwindle.

Rick Palacios Jr., director of research for John Burns Research and Consulting, suggests that the divergence could also be resulting from the provision of other financing options for single-family projects.

“Single-family solid, multifamily weak is a fairly consistent theme across a lot of the country,” Palacios told the LA Times. “You’re hard pressed to seek out a market where developers and investors are gung ho on apartments.”

In Los Angeles, developers face additional challenges, including Measure ULA, a property transfer tax aimed toward funding reasonably priced housing.

Aerial view of a suburban Southern California neighborhood. Justin – stock.adobe.com

The tax, commonly generally known as the “mansion tax,” applies to properties sold for greater than $5 million, adding to the financial burden of developers.

Despite recent efforts by state lawmakers to streamline the housing approval process, developers remain cautious.

Laurie Lustig-Bower, a industrial real estate broker, notes to the outlet that while some landowners are reducing prices to facilitate sales, many are holding out for higher offers.

Looking ahead, developers like Kahan are cautiously optimistic but remain wary of rising costs and unsure market conditions.

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