The UCLA Anderson Forecast and UCLA Zinman Center for Real Estate released a report that says “recession has come to California with implications for the Golden State’s housing affordability and homelessness.”
According to Senior Economist Jerry Nickelsburg, Director of the UCLA Anderson Forecast, the economic backdrop is still uncertain as a sharp decline in the nation’s production of goods and services continues, and the severity and duration of the pandemic remain unknown. He recommends California policies that could arrest some of the worst economic impacts of COVID-19 by incentivizing development of new and affordable housing.
“For California, a decline in employment well in excess of 2 million jobs is expected. Though some jobs will come back when shelter-in-place policies are eased, there will be extended unemployment for many. This unemployment is heavily weighted in the service industries, notably leisure and hospitality, retail, and personal care services. These are sectors with lower wages on average, and therefore, the burgeoning rolls of the unemployed are disproportionately Californians who were pre-recession shelter-cost burdened.”
Converting Retail to Residential
“California state and local governments could induce the conversion of idle retail space into residential properties. They would subsidize, perhaps heavily, the demolition of the existing property and the preparation of the land for residential construction.”
Nickelsburg says the recession will also affect new home construction.
“Going into the recession, net of wildfire recovery rebuilding, California was at an annual rate of new home production of about 100K units. This is only 60% of what is needed to keep up with normal population gains and one-third of what is needed to begin to make a dent in affordability. As it is expensive to stop midstream, mothball, and re-start at a later date most new homes already under construction will likely be completed. But follow on projects may be limited. Our best estimate is that they will be less than half of the immediate pre-recession levels.”
Nickelsburg adds that the decline in new home construction is a consequence of the perceived risk associated with new development. Will the pandemic come back in 2021? Will there be sufficient income to purchase or rent the homes at prices that permit repayment of construction loans? And if the recession is disproportionately hitting the middle- to low-income portion of Californians, “is it not riskier to build homes for these cohorts? These considerations weigh on developers and their financiers alike.”
He says that this is a “worst-case outcome” for the state, where new home production and sheltering the homeless are critical issues.
The Good News
So, there is positive news.
More construction workers should be available, where there were constraints on labor before the recession, Nicklesburg says. Additionally, the cost of building materials has declined. Lumber prices are down 25% he reports, and copper has fallen 17%. “Some easing of regulatory burdens [mean] there are now incentives for developers.”
But until an effective vaccine is found to combat fears of COVID, it’s difficult Nickelsburg says, to “put that uncertainty aside and push forward with building. Even with more regulatory easing, adding significant new housing in the near-term is therefore not likely if the private mark is left to its own devices.
“But there is room for an innovative policy induced reversal of the flagging construction of homes.”
Monthly condensed analyses of crucial real estate and economic issues offered by UCLA Anderson Forecast and UCLA Ziman Center for Real Estate.