How many houses are built each year

Single family residential (SFR) starts were a slight 3% below one year earlier in the six-month phase ending July 2022. During those same six months, multi-family construction starts were up 6% from the six-month phase a year earlier. 

In 2021, multi-family construction experienced a 17% increase from the prior year, with 52,800 new units started. Demand for multi-family rentals has generally been higher during this past decade compared to new SFRs. But new multi-family construction continues to hit roadblocks in the form of labor and supply shortages — on top of vocal not-in-my-backyard (NIMBY) advocates.

SFR construction starts in 2021 were up 7% from the previous year, for a total of 64,500 new SFRs started. SFR construction bounced upward nicely in 2021, the result of homebuyer fear of missing out (FOMO), low home-resale inventory, and demand for remote locations where zoning does not much interfere with construction starts as occurs in coastal urban centers. And yet, compared to the 150,000 SFR starts achieved in 2005 at the height of the millennial boom, the 64,500 SFR starts achieved in 2021 are a fraction of the starts needed to meet demand.

State-initiated legislative efforts to add to the low- and mid-tier housing stock have focused on encouraging more multi-family construction in recent years. As a result, metro areas with the highest annual increases in construction include Sacramento, Riverside and San Diego. The most anemic growth occurs where zoning remains restrictive for housing, including San Francisco, San Jose and Los Angeles.

Builders are finally beginning to cash in on legislative incentives and rising homebuyer demand. However, leaping interest rates and spiraling sales volume have crushed builder sentiment in 2022. The real estate recession along with material and labor shortages have put pressure on builder confidence. These factors combined will hold back residential construction starts from reaching their full potential until the recovery from the next recession, with prices expected to bottom around 2025 and the recovery to pick up steam around 2027.

Updated September 21, 2022. Original copy posted November 2012.

Chart 1

This chart illustrates the number of California residential construction starts during semi-annual phases ending in July and February.

Chart update 09/21/22

Chart 2

Chart update 02/16/22

*Forecasts are made by firsttuesday and are based on current new home sale trends, actual construction starts and current government policies.

Detached single family residential construction trends in California:

• 34,800 SFR starts took place in the six-month period ending July 2022. This is 1,100 fewer starts than occurred during the same period one year earlier, a 3% decrease.
• 64,500 SFR starts took place in 2021. This is up 6%, or 3,700 starts, from 2020.
• For perspective, this cycle’s peak year in SFR starts was 2005 with 155,000 starts. The lowest year was 2011 with 22,000 starts.

Detached SFR forecast:

• firsttuesday‘s projection for SFR starts in 2022 is a relatively flat year. The forecast for 2022 is most affected by the downward pressure placed by the recessionary jobs market, ongoing supply shortages and rising interest rates. Expect SFR starts to remain below their potential in the next two years, until the recovery begins to pick up steam, likely around 2024.
• SFR starts have increased gradually each year since bottoming in 2011, but remain far below the Millennium Boom peak.
• Subdivision final reports will remain low until developers sense a return of first-time homebuyers is on the horizon.
• The next peak in SFR starts will likely occur during the boomlet period of 2025-2026.

Multi-family housing construction trends:

• 26,200 multi-family housing starts took place in the six-month period ending July 2022. This is 1,500 more starts than occurred during the same period one year earlier, an increase of 6%.
• 52,800 multi-family housing starts took place in 2021. This was 17% higher than 2020, but still below 2018 when multi-family starts hit their most recent peak.
• For perspective, this past cycle’s peak year in multi-family housing starts was 2004 with 61,500 starts. The lowest year was 2009 with just 9,500 multi-family housing starts.

Multi-family housing forecast:

• firsttuesday forecasts a slight increase for multi-family housing in 2022. As the jobs recovery is stuttering alongside rising borrowing costs, lenders continue to keep a tight fist on funds, hampering builders. This dynamic will only worsen as interest rates continue to rise, slashing buyer purchasing power. The concurrent building material and construction labor shortages are also holding back new development.
• Multi-family housing starts were expected to rise at a gradual pace beginning in 2020, as several legislative changes aimed at increasing multi-family construction encourage more building of dense, low- and mid-tier housing. However, social distancing restrictions and tightening lines of credit pushed multi-family construction numbers down significantly, though they are now picking up.
• The next peak for multi-family housing starts is likely to occur around 2027-2028, with the recovery of all jobs lost to the oncoming recession and crux of the next housing boom.

Statistics related to California housing:

• 14.5 million total housing units existed in California in 2021, 13.4 million of which are occupied and 7.5 million of which are owner-occupied, according to the U.S. Census Bureau. This continues a slight increase over prior years.
• Prior to 2020, California population growth had been increasing at a rate of 0.5%-1% per year. But California’s population has since begun to decline, the result of more deaths than births alongside more residents moving to other states in search of a lower cost of living.
• Nearly 17.6 million people were employed in California in June 2022. This is 165,600 fewer jobs than were held prior to the 2020 recession, according to the California Employment Development Department (EDD).
• The rental vacancy rate averaged 4.3% in 2021.

Related articles:

Nobody’s home: California’ residential vacancy rates

Golden state population trends

Key factors for builders

How do builders decide when and where to build? Builders analyze existing home sales, end user demand and local employment. Together, an analysis of these and ancillary factors produces a prediction of future construction trends.

Obstacles facing SFR builders

While end user homebuyer-occupant demand is the ultimate driver of construction starts, several obstacles face builders in 2021-2022 that will determine the pace of SFR and condo starts.

Builders rely on buyer-occupants to support new home construction. Discouraged by low inventory, high home prices and rising interest rates, buyer-occupant demand to purchase a home in 2018 remained stunted through 2019. However, 2020 saw interest rates plunge to record lows, which boosted buyer interest, a need unfulfilled by available resale homes since sellers remained timid in 2020. Yet, builders were largely unable to meet homebuyer demand due to social distancing measures and tightened access to credit.

In 2021, construction began to pick up as homebuyer enthusiasm exceeded the resale market and spilled over into new homes. However, building material shortages have caused delays and soaring costs, pricing out many would-be homebuyers and holding back construction increases.

Obstacles of concern to future construction starts include:

• the historic job losses of 2020, over 300,000 of which still need to be recovered in California as of April 2022;
• tightened credit for homebuilders;
• building material shortages which continue in 2022;
• rising mortgage rates, reducing homebuyer borrowing capacity; and
• restrictive zoning regulations, which discourage density in desirable living areas.

Until these factors are considered and a conclusion reached, builders (and their lenders) may not take for granted that construction starts will pay off. Expect starts to remain low until most of these factors collectively improve and starts have another 12-18 months to catch up, likely to occur around 2027.