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Barbara Bashall: What lies ahead in construction, housing trends

Barbara Bashall
Lumber costs escalated last summer, but prices are returning to normal this year due to increases in production capacity.
Submitted Photo

I recently attended the Golden State Builders’ Exchange conference, where leaders in the construction industry shared trends, statistics and predictions. The data are interesting, and portend both promising and challenging possibilities.

According to information presented at the conference from the Eberhard Center for Business and Policy Research, the construction economic forecast for California includes:

The projection of 130,000 new housing units in 2019 – 65,000 single family homes and 55,000 multi-family units – will be enough to keep up with the state’s population growth but not enough to cover the existing backlog.

The housing shortage will continue, and California will be a majority renter state by 2025.

Due to limited worker availability and higher wages, job growth in the construction industry will slow this year to an increase of about 20,000 compared to 40,000 to 50,000 in recent years.

The state’s population will reach 40 million this year.

One of the most startling statistics presented at the conference is that five large wildfires in 2018 destroyed 21,000 homes across six counties. Those losses represent more than 85 percent of all new housing built in those areas over the past 10 years.

Last year was not a robust year for new housing in California, with only 120,100 new homes built. Housing starts will total between 127,600 and 130,000 this year. Only 20 percent of all construction spending in 2019 will come from new projects that start this year. The other 80 percent of spending is already in backlog, and comes from construction started in 2016-2018.

Some apparent challenges carry with them silver linings. It’s true the cost of building materials that incorporate steel and other metals will likely rise, especially if planned but recently-delayed tariffs are enacted. But prices for some building materials, particularly those produced domestically, may see more modest increases.

Over the past few years, a chart tracking the cost of building materials resembled a roller coaster ride. Local experts say the cost of basic building materials, such as plywood, has now leveled off.

“Last year the cost of lumber materials in our industry went to historical highs, and then started dropping substantially last summer,” said Kennan Pardini, Co-owner and Commodities Purchasing Agent at Hills Flat Lumber. “The supply is a little more stable this year because of increases in production capacity. Supply and demand is more balanced instead of supplies coming up short. I think it’s going to be a great year to build.”

Jeff Pemstein, Division President of Towne Development of Sacramento, concurs. The Sacramento-based company is developing Berriman Ranch in the south county, featuring 30 single family homes in the mid-$400,000 range.

“We’re proud to be working in Nevada County in this beautiful setting, and offer the quality and style of homes that we build,” said Pemstein.

However, new state mandates will increase the future cost of new homes.

“The biggest impact will be the 2020 solar mandate that all new homes have solar systems, which will add at least $15,000 to the price,” Pemstein explained. “The housing affordability index is at a 10-year low, with only 56 percent of families able to afford to buy a median-priced home. The affordability index will continue to drop unless we stem the tide of over-regulation, increases in exactions, labor shortages, and material cost escalation.”

A cost analysis of a 2,000-square foot home in Nevada County is illustrative: land $40,000, permits and fees $45,000, architecture and engineering $20,000, financing and title fees $10,000, site improvements such as roads, sidewalks and utilities $50,000, marketing and sales costs $25,000, developers’ profit $40,000, and labor and materials – the actual construction of the home – $200,000. Total: $430,000.

The need to rebuild communities ravaged by the wildfires mentioned above has exacerbated the shortage of skilled labor in the construction industry. That labor shortage affects other types of projects in addition to housing. Nevada Joint Union High School Superintendent Brett McFadden told me when the district solicited bids for projects to be funded by voter-approved Measure B two years ago, there were up to eight bidders for some projects. “Now we’re lucky to get one or two,” said McFadden.

A lack of workers drives up costs. For example, the parking lot project at Nevada Union was divided into two parts. The first part was completed on time and on budget. Projected costs for the second part of that project are running 27 percent higher now than projected two years ago. Brett says the district will pay for those increased costs by making changes elsewhere, such as scaling back other project costs or even altering project priorities.

Another variable that affects construction costs are interest rates. After several hikes over the past year, the Federal Reserve doesn’t appear eager to increase rates in the near future. Tina Skrukrud, Berger Mortgage Branch Manager, said she expects interest rates to hold steady.

“Depending on the type of loan, rates are mid-four to low-five percent, and it’s looking like it’s going to hold,” said Skrukrud. “But that’s a guessing game and rates vary on a daily basis.”

The primary challenge for which there is no solution on the immediate horizon is the lack of skilled construction workers. That’s why the Nevada County Contractors’ Association is working with local education leaders to create more career, technical, and vocational opportunities in our schools.

Even despite the persistent labor shortage, the local housing market continues to be strong. Several new housing developments are under construction, and other promising developments are in the planning stages (see my October 1, 2018 column). Within the next two years, there could be more than 340 new homes and apartments on the market to ease the local housing crisis.

And that’s good news.

Barbara Bashall writes a monthly column for The Union. She is the executive director of the Nevada County Contractors’ Association, a nonprofit group of 320 general contractors, sub-contractors, building material suppliers, and other construction professionals whose mission is to promote high standards, integrity, and ethical practices within the construction industry. Visit NCCABuildingPros.com or call 530-274-1919. Freelance writer Lorraine Jewett contributed to this column.

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