Housing Slump in California Seen Worsening

Paced by sharp declines in California, nationwide housing construction in October fell to its lowest level since the recession of the early 1980s, the Commerce Department reported Tuesday.

Triggered by plunging consumer confidence and the growing inability of builders to obtain loans, the pace of housing construction has now fallen for nine straight months, the longest string of declines since such statistics were first tabulated in 1959.

Housing analysts viewed the latest numbers as hard evidence that California’s real estate market is getting markedly worse--with more bad news to come. Some California developers are abandoning projects that were already started, and they are resorting to severe layoffs, industry officials say.

“I think it (California) will get worse before it gets better,” said Neil Dimick, national director of real estate services for Deloitte & Touche, the accounting and consulting firm. “I think this is going to last about two years.”

The slowdown in new-home building is particularly bad news in California, where the construction industry created nearly 1 million new jobs since the last recession, or about one-fourth of all new employment in the state, according to David Hensley, acting director of business forecasting at UCLA.

For every new construction job, two other jobs are created, but lately construction-industry employment levels have been dropping, an ominous sign for the future of the state’s economy, Hensley said.

Nationwide, housing starts fell almost 27% in October, compared to a year ago, and 6%, compared to the previous month. That put building at a seasonally adjusted annualized level of just over 1 million homes, the lowest since June, 1982.

That means that 1 million homes would be built if the October pace was maintained all year long. “It’s a substantial drop, no question about it,” said Adrian Cooper, a Commerce Department economic analyst.

The drop was especially severe in the western United States, including California, where building activity fell to a seasonally adjusted annual level of 266,000 units. That was 33% lower than in October, 1989, and 17% lower than in September.

“New home sales in the West have been plummeting,” said Robert Villanueva, director of forecasting for the National Assn. of Home Builders. California accounts for roughly half the new-home production in the western United States.

The recent decline in new-home construction in California has been particularly pronounced in once-hot areas such as the Antelope Valley in northern Los Angeles County and the Inland Empire east of Los Angeles, housing experts say.

Market conditions are starting to resemble the housing slump of the early 1980s, when mortgage rates soared into the teens and decimated California’s and the nation’s real estate industry.

Mortgage rates are stable today, hovering around 10% for fixed-rate loans, but consumer confidence has been shot by the turmoil in the Middle East and lenders have all but quit making residential development loans, real estate experts say.

Although the California housing market has been in a slow decline since last year, the drop has accelerated in recent weeks after Iraq’s invasion of Kuwait on Aug. 2.

The slowdown has been worsened because builders are having difficulty getting loans. Lenders are reluctant to make new real estate development loans because existing loans have soured in increasing numbers, causing growing losses at thrifts and banks.

In Southern California, builders have taken extreme measures to deal with the slump, in many cases laying off as much as 40% of their work force, according to Dimick of Deloitte & Touche. If the downward trend continues, he predicted, it will force added layoffs and may cause some builders to merge with other firms--or even go out of business.

“I had one client, who normally sells about 1,000 homes a year, tell me he’s selling about six or seven homes a month,” Dimick said. “That’s serious (trouble).”

Some builders are considering investing their own money in projects just to keep their staffs working, Dimick said. “That’s not something they normally do,” he said.

The pain from the downturn has rippled through all corners of the real estate industry, from interior decorators and carpet supply firms to the financially strongest development firms.

Two of Orange County’s largest developers, Irvine Co. and Santa Margarita Co., have both laid off employees and scaled back development plans in recent days. Kaufman & Broad Home Corp., the state’s largest single-family home builder, has laid off about one-quarter of its 650-person staff in California.

“It’s a general slowdown that affects (almost) all the markets,” according to Bruce Karatz, Kaufman & Broad’s chief executive officer.

On a national level, the Commerce Department reported that construction of apartment buildings of five units or more fell to 156,000 in October, the lowest level since August, 1963, when those numbers were first tabulated separately. The apartment construction market was a “disaster zone,” said Villanueva of the National Assn. of Home Builders.

The department also noted that the annualized pace of housing construction in the South fell to 395,000 units in October, the lowest level since October, 1981. The annualized rate of 266,000 homes built in the western United States was the lowest total since November, 1982.