Population growth exceeds new housing – by a lot

New residents outpaced residential construction in all of California’s largest counties during 2014. Here’s a further drilldown of the U.S. Census data from July 2013 to July 2014:

• in Los Angeles County, 254 new units were built for every 1,000 new individuals;
• in Orange County, 428 new units were built for every 1,000 new individuals;
• in Riverside County, 177 new units were built for every 1,000 new individuals;
• in San Diego County 205 new units were built for every 1,000 new individuals;
• in San Francisco County, 331 new units were built for every 1,000 new individuals; and
• in Santa Clara County, 332 new units were built for every 1,000 new individuals.

These figures show there isn’t enough new residential construction to accommodate new residents. The situation is even more extreme when you shrink down the area from the county level to these areas’ highly urbanized city centers, as seen in a recent piece by Zillow.

Population growth is always a good thing for the real estate market as everyone needs shelter, whether owned or rented. Granted, not every single new individual reported above needs a new place to live. About 40% (give or take depending on the area) of each county’s residents are under 18 and thus don’t require additional housing units. However, even after accounting for this reduction, new adultsmoving to the area still outpace new units being built.

As population growth outstrips new residential construction, these areas have experienced a correlating drop in residential vacancies. In 2014, the vacancy rate in California was:

• 1.2% for property otherwise occupied by homeowners (including those sold to a homebuyer and awaiting occupancy and unsold, vacant homes not for lease); and
• 4.5% for rental properties.

For historical comparison, 1.2% is about average for California homeowner vacancies, having settled at this level after rising during the overbuilding years of the Millennium Boom and dropping during the following recession. However, today’s rental vacancy rate is well below average. This indicates these new residents are primarily seeking rental properties, not ownership. When rental vacancies fall below average, the price of rents naturally rises.

Thus, new residential construction will undoubtedly be concentrated in the multi-family sector. Builders build to meet demand, after all, and it’s clearly present in the newcomers choosing to rent. However, builder obstacles are:

• outdated zoning regulations, limiting multi-family construction in the most desirable areas; and
• tight access to credit, as lenders find safer places to park their reserves than the still shaky construction industry.

All the same, expect multi-family construction to increase – albeit gradually – in 2015 and in the years following. When the next Great Confluence of Generation Y and Baby Boomer homebuyers occurs, likely in 2019-2020, multi-family construction will pick up in earnest. Until then, expect rents to remain high as new residents push demand for rentals.