Will hot housing market save California economy?

150 150 John Guenther

Here in California, housing is heating up and so is writing about the housing industry. 

The economic reporters have read the tea leaves and suggested that California beat Texas in the July jobs numbers partly because of the housing revival.

And it makes sense: the entire housing industry represents 10 percent of the California economy. That’s according to an August report from the California Homebuilding Foundation on the economic effects of the industry.

It goes on to say new home construction represents $20.7 billion to state economy.

So, with high demand in housing, can we expect a plethora of construction jobs on the horizon? The CHF report estimates we’ll see a 25 percent increase in employment in 2012 over last year’s numbers.

“Job creation is central and primary to economic recovery, and the building industry like no other industry defines economic recovery,” said Steven Schuyler, vice president of government affairs for the Building Industry Association of Southern California. “When we are working, jobs are being created and economic recovery is unmistakable.”

If you’re looking at construction permitting numbers, then those jobs seem like they’re well on their way.

“Our projections for the next couple of years show that total housing permits (hence construction) will rise from 47,100 last year to nearly 60,000 this year and 76,000 next year,” said Robert Kleinhenz, chief economist at the Kyser Center for Economic Research at the LAEDC. “These projections correspond to impressive 24.2 percent and 29.9 percent annual increases, and they will lead to job gains.”

He added that we’re well off from California’s more usual 150,000 to 200,000 permits. Also unfortunately, all these construction jobs can make the state vulnerable to bubbles and downturns.

“Housing-related industries tend to be among the more volatile in the economy, with larger increases compared to other industries when the economy is doing well, and bigger decreases when the economy hits a slump,” said Kleinhenz. “California’s housing industries exhibit even more volatility than the national market.”

Luckily, we’re on an upswing. But as is always the case both in California and nationally, there is a caveat to recovery. Permitting is a notoriously long and costly process for builders in California compared to other states.

“The issue is mainly that there are too many environmental reviews, which are too easily thrown up by local NIMBY’s who want to restrain growth,” Christopher Thornberg, Founding Partner, Beacon Economics. “On top of this is the sheer cost factor. One permit in the state averages above $60,000.”

And Kleinhenz notes that, with more than 90 percent of our population in dense urban areas, there’s going to be a lot of people close new projects who might have something to say about them.

So, would the California economy be better off right now with a less strenuous approval process?

“Probably,” said Kleinhenz. “But, that should be viewed as just one aspect of a broader strategy to address concerns about the regulatory environment here in the state, while also addressing the fiscal challenges facing state and local governments.”

One of goals of the California Economic Summit is looking for smart ways to streamline business regulations. On the “to-do” list of the Summit Action Plan is to create a “permit streamlining unit” to decrease time it takes to get through business permitting processes.

Second, the Summit strongly advocates CEQA reform that preserves the benefits envisioned when it was created while jettisoning the use of the law as a bullying tool.

At this point in the recovery, it’s tough say that more construction jobs are for sure going to lead us into a boom times economy. And we’re nowhere close to the peak times from 2005-2006 when close to a million people were employed by the housing industry.

“Ultimately the construction industry is not by itself big enough to drive a full out recovery in the state,” said Thornberg. “Tourism, technology, agriculture, and professional services are more likely to drive the continued recovery of the overall state economy, although construction can certainly play a role.”

Still, we’d best make sure, when there’s this need for housing, the most worthy projects can move along at a good pace, walls can go up and concrete gets poured. Because when housing is hot, the jobs will follow.


John Guenther

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