Population, Construction, and Home Prices
The last months of 2006 have seen more of the same from Bay Area housing markets – falling sales and flat prices continue to be the rule. Unfortunately, the East Bay has been on the bad side of this regional average: sales have fallen to levels last seen in the 2001 recession, and the median sales price for all homes has shown moderate declines in both East Bay counties. In Contra Costa County, the median sale price for all homes had fallen by over 8% from the record high set in early February before staging a small recovery in the last few months. Alameda County has experienced a less severe version of the same trend: from February to August, median sales prices fell just under 5% before staging a similar recovery in the fall months.
Alameda County: Total Home Sales (area, right, Seasonally Adjusted) and Median Sales Price of All Homes (line, left, $1000s Seasonally Adjusted)
Contra Costa County: Total Home Sales (area, right, Seasonally Adjusted) and Median Sales Price of All Homes (line, left, $1000s Seasonally Adjusted)
Our national and state forecasts have repeatedly stressed the idea that historically, significant home price declines only occur in the wake of recession. Thus, since we are not forecasting a recession, we have not included a significant decline in home prices. As we discussed at some length in last quarter’s East Bay Forecast, the declines in median sales prices seen in the East Bay are not inconsistent with this story. Instead, the East Bay shares many of the same features that have led to similar price declines in San Diego and Sacramento – the price of new homes has fallen precipitously, and new homes make up an above average share of total sales in these markets. This pattern is nothing new: historically, the sellers of new homes have been much more willing to drop prices than sellers in the resale market.
Alameda County: Median Sales Price of New Home vs. Resale Home ($1000s Seasonally Adjusted )
Contra Costa County: Median Sales Price of New Home vs. Resale Home ($1000s Seasonally Adjusted)
But why has the price of new homes in the East Bay and these other markets fallen so dramatically, while new home prices are still rising in other counties? The common denominator in these unlucky counties is the relationship between growth in population and the number of new homes built in the county. In the graph below, the horizontal axis ranks the biggest counties in California by the difference in the growth rate of their populations and their housing stock from January 2000 to January 2006: counties where population growth has outstripped growth in the number of homes will appear further to the right. Similarly, the vertical axis ranks these same counties by percentage change in the price of a new home from November 2005 to November 2006. Not surprisingly, there is a positive relationship: the counties where the pace of building over the past five years has kept close to population growth tend to be the counties that have seen the biggest declines in new home prices this year.
Change in New Home Prices vs. Building Pace for Major CA Counties
This relationship suggests two kinds of housing markets in California right now. At one extreme, counties like those surrounding Sacramento have actually seen the housing stock grow faster than population, and new homes are a significant portion of the overall market. Not surprisingly, they have seen some of the biggest year-over-year declines in the median sales price of a new home in 2006. At the other extreme, markets like L.A. County have seen population growth significantly exceed the pace of building, and new homes are a tiny fraction of the overall market. In these circumstances, new homes prices have shown more staying power. The East Bay’s experience has been somewhere in the middle: the building boom has essentially kept up with population growth over the past five years, implying a middle of the road decline in the price of a new home. Of course, the fate of the new home market is intimately connected to the prospects of the local construction industry. The graph below has the same horizontal axis as the last graph: counties with a big positive difference between population growth and growth in the housing stock are further to the right. However, this time the vertical axis shows the percentage change in total number of building permits issued between January and November 2005 versus 2006.
Change in YTD Building Permits vs. Building Pace for Major CA Counties
Again, we see a positive relationship: counties where building has kept pace with population growth are also the counties that have seen the biggest drop in permit activity – no surprise given the trend in new home prices in these counties. However, this time there is a substantial difference between the East Bay counties. While the housing stock has grown roughly as fast as population growth in both counties, Contra Costa County has seen the predicted drop in residential building permits, while Alameda County is a significant outlier, with one of the biggest percentage increases in permits seen anywhere in California.
Alameda County: Building Permits by Type (Seasonally Adjusted)
Contra Costa County: Building Permits by Type (Seasonally Adjusted)
The difference between these counties is the type of building. Contra Costa County’s building boom was primarily in single family homes, which in recent months have fallen back to lows seen during the 2001 recession. In contrast, Alameda County’s building has focused more on multi-family construction, which is still healthy even today. This is the classic choice between building denser and closer in versus building further out (similar to the dynamic between Sacramento County and the surrounding counties): as the larger building boom runs out of steam, the pendulum swings away from higher cost single family units further out and begins to favor lower cost units in the more densely populated areas. | |
