CENTRAL VALLEY CALIFORNIA HOUSING 4Q18: With Starts at 2008 Levels, Market Benefits from Bay Area Overflow

  • In 2018, annual new home starts are up 10% over 2017 levels; Starts have not been at this level since 2008
  • Starts in San Joaquin county account for much of this strength – up 37% YoY on strong Bay Area employment growth.
  • Affordability issues are an increasing concern in this market: Production of homes with base pricing over $500k represented 16% of the new home market in 2018, up from 10% the previous year.
  • Finished Vacant Inventory has been undersupplied in this market for over five years and the recent hiccup in sales activity has allowed for construction to partially catch up.

Metrostudy’s 4Q18 survey of the Central California Valley housing market shows that steady job growth continues to have a positive impact on the region’s new home market. Despite a sluggish 4Q18, annual starts have increased 10% over the past year. Building activity has not been to the current volumes in this region since 2008. Specifically, San Joaquin County ramped up activity this past year. Annual starts are up 37% compared to the year prior, with significant activity occurring in markets most impacted by Bay Area employment to the west including Mountain House, Tracy, and Lathrop. Merced County increased annual starts 59% – the highest level of activity since 2006.

New home closings have kept pace in the region with 9,199 homes in 2018, up 11% from the year prior. Closings in the third quarter of 2018 slowed from a strong spring selling season (down 17% QoQ), but closings experienced an unusual uptick in 4Q18 with a quarterly increase of 11%. Regionwide, the median “offer to build” base price for new homes is now $356k; up 3% from last year, but down slightly for two consecutive quarters. The market begun to cool in mid-summer, with sales slowing and buyer pushback on continued price increases. Affordability issues are an increasing concern across all of California including the Central Valley.

The chart below shows the number of new home starts across price ranges throughout Central CA. An increase to starts in the higher price bands has occurred over the past year. Homes valued over $500k represented 16% of the new home market in 2018, up from 10% the previous year.

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“The Central Valley Market has experienced solid economic performance over the past seven years,” said Aaron Stubblefield, Regional Director of Metrostudy’s Northern and Central California region. “Whereas other markets in Northern CA had stronger growth earlier on, then decelerated in recent years, the Central Valley has remained steady through the life of the cycle. Rising home prices paired with increasing interest rates have become a hurdle with many Central Valley markets given affordability concerns. Pent-up demand remains throughout most of Central California.”

Housing inventory levels have been low for years, but are starting to rise back to levels that are more balanced. Finished vacant inventory (FVI) increased 22% over the last quarter to 1,209 units. Despite a sizable uptick, it still only represents a 1.6 month supply of standing inventory. FVI has been undersupplied in this market for over five years and the recent slowdown in sales activity in 3Q18 has allowed for construction to partially catch up. Current levels of FVI are not concerning, but if this trend continues at a similar pace through 2019, it is a strong indicator of a turning market.

The Central Valley has been absorbing more lots than are being delivered regularly since 2014, causing a decline in the number of vacant developed lots (VDL). Over the past year, VDL supply has dropped to its lowest level since 1Q06. Finding labor is a challenge for builders, with the most undersupplied labor types in the Central Valley being construction laborers, roofers, and electricians. Labor constraints will undoubtedly apply upward pressure on incomes for 2019. Assuming employment growth remains intact and inventory levels increase at only a moderate pace, the Central Valley housing market should remain steady through 2019.

For information contact:
Aaron Stubblefield  – 916-580-2019

About Metrostudy: Metrostudy is the leading provider of primary and secondary market information to the housing and related industries nationwide. Metrostudy provides research, data, analytics and consulting services to help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. For more information, visit www.metrostudy.com

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