UCLA—Economists Forecast Lean Years For Home Builders Despite High Demand

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A run of good fortune by local homebuilders is likely to come to an end over the next three years, according to the latest UCLA Anderson Forecast.

The quarterly report, released last week, shows that the local housing supply remains insufficient to keep pace with the population of Southern California. But economic conditions will result in fewer potential buyers.

In recent years, builders have seen consistent price gains across the residential construction industry and found ready buyers for the relatively few homes that were built.

“Even though we don’t expect Southern California to be immune from the slowing trend, there is a large demand for new housing in relation to what’s been produced,” said Tom Lieser, associate director of the forecast. “We’ve had a decade of low production.”

But Lieser said that if the economy improves, it would mean higher interest rates and higher prices, which can also affect home sales.

Residential construction in the state has benefited from strong demand, rising prices and falling mortgage rates, according to the forecast. Home sales are declining, but prices continue to rise across the state, except in the hard-hit Bay Area.

Lieser said that Southern California’s bad economic times in the early 1990s paralleled an overproduction of housing that led to lower returns for builders, who took that lesson to heart. Just as with commercial real estate, which once was abundant and is now more in line with demand, residential development proceeded prudently in recent years.

Evidence of this came with last week’s announcement by KB Home that the company exceeded anticipated earnings for the second quarter of the year, with income up 43 percent over the like period a year earlier.

KB Home excelled with starter homes, which is where the largest demand has been, Lieser said. Those are homes that are identified as affordable and sell for between $200,000 and $300,000.

“Maybe we don’t catch up with the increase in the population and workforce, but we cater to the market demand, which is those capable of paying the rent or handling the mortgage,” Lieser said.

Forecasters predict new construction in California will average 157,000 units this year and decline slightly in 2002 and 2003. Over the last decade, builders averaged 100,000 new homes a year.

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