The Politics of Drought: Homebuilding is Already Leading the Way on Water Conservation

These days, it’s nearly impossible to avoid news of one of the worst droughts to grip the State of California since records were first kept in the mid 1800s.  And it’s not just California --- as of early August, the U.S. Drought Monitor was reporting that just over one-third of the contiguous U.S. states were experiencing drought conditions.  In the case of California and the southwest U.S., a so-called “ridiculously resilient ridge” (or Triple R) of high pressure has been squatting off the coast of western Canada since January 2013, thereby diverting storms normally destined for California instead to Alaska, where record amounts of rain and snowfall have been reported.

The concern about this high pressure anomaly is that the longer it lasts, the less likely it will be to break up soon, and in the interim reinforces the jet stream’s current northern trajectory.   While it’s quite possible that extremely rare events like the Triple R are simply borne by chance (and so may end at any time), given that higher global temperatures have raised the risk of rare weather extremes, there’s a distinct possibility that this drought may continue for some time to come.

However, there are some important differences between this event and the last major drought to hit California in 1976-77, in which the state’s reservoirs plummeted to 41 percent of average capacity (versus just over 50 percent as of late August 2014).  On the demand side, although the state’s population has doubled since the last drought, per-capita water use has also dropped with the use of new water management technologies.  

It was actually the drought of 1987-92 which marked the beginning of modern water-use practices, including more efficient use of water for agricultural which made more growth in the cities possible.  Moreover, the delivery of water in general has greatly reduced waste due to evaporation or seepage, while reclaimed water for outdoor use is becoming increasingly commonplace, especially for water-hungry uses such as golf courses and freeway embankments.

Consequently, whereas municipalities might simply have refused to grant new building permits in past droughts, today the approval process for new projects has water availability as a key component.  For new developments of 40 acres or more in California, since 2002 the state has required a water supply assessment in order to confirm that there will be adequate supplies of water – which can also include new sources through conservation, recycling and transfers  -- as long as these sources include appropriate quality, quantity and reliability.

On the supply side, new homes are actually exponentially more efficient than older ones, especially those with water-hogging plumbing fixtures.   According to a report commissioned by the CBIA, an average three-bedroom home with four occupants built today uses 29,000 fewer gallons of water than smaller homes built in 2005.  Certainly one big reason for that is the “CalGreen” code, which become law in 2011 and mandated a 20-percent reduction in water use through relatively simple solutions such as low-flow toilets, shower heads and faucets.

One builder on the forefront of the water issue is Los Angeles-based KBHome, which debuted their first “Double ZeroHome” at its Dawn Creek community in the high desert city of Lancaster (average annual rainfall:  7-8 inches) earlier this year.  So named due to its dual emphasis on energy and water efficiency, the home has been engineered to recycle its own drainwater and re-purpose it for its low-water landscaping.

According to the builder, the home can save up to 150,000 gallons of water each year compared to an older resale home, for a savings of about 70 percent. Other clever innovations include a dishwater that stores the water from the last rinse cycle for use in the first pre-rinse cycle of the next load, and an energy recovery system which extracts heat from drainwater and diverts it to the home’s tankless water heater to cut down on heating costs.

Still, based on sheer numbers alone, the solution to the future availability of water has much more to do with retrofitting the existing housing stock versus the approval of new homes; if homes 30 years of age or older were retrofitted to the CalGreen standards, estimates of water savings statewide rise to 300 billion gallons per year.  Yet with a housing inventory of over 13 million California residences, encouraging homeowners to make these changes will be neither easy nor fast.  Most likely, what we’ll see are a mix of carrots and sticks from cities and water agencies to encourage greater water efficiency in homes and businesses.

California Builder magazine to cease publishing offline version

California Builder magazine, the CBIA-associated title which helped to launch my sideline writing career when I was with Hanley Wood Market Intelligence, has announced that the current edition will be the last offline version. Due to a lackluster ad sales environment and budget cuts, the magazine will now be only online.

Between January of 2006 and the middle of 2007, I wrote 9 or 10 feature-length articles for the magazine including market trends for SoCal/CentralCal/NorCal, high-rise condos, mixed-use developments, master-planned communities, transit-oriented developments and adjusting to the new market realities. I learned a lot from that experience, and it gave me the confidence (and the proof) to pursue more writing assignments with the Los Angeles Times and, more recently, Inman News.

John Frith, the VP of Public Affairs for CBIA and PCBC, has written a final farewell that I think makes an interesting read of its evolution. Some excerpts:

The downturn in both the homebuilding and publishing industries has caught up with us, and with ad revenue down sharply, it’s not possible for CBIA to subsidize the magazine’s production costs. So I thought I’d steal the headline from our late Chairman Ray Becker’s last column in 2008, because this issue marks the end of one era and the beginning of a new one.

The brand is not going to go away completely. The dead-tree edition is suspending publication but may return when times improve. But in the meantime, Editor Greg Robertson and I are working to reinvent California Builder as an online publication for our members. We’re still working out details, but we hope to continue publishing at least one trend story on our bimonthly publication schedule, and to create a blog and enhanced Web site to keep you all informed of breaking news in the industry....

During the first couple of years, cover stories ranged from economic forecasts to exclusive reports on landmark legislation such as SB 800, with promotions for PCBC and lavish coverage of the Gold Nugget Awards regularly occurring as well. We added some new standing features, including chief lobbyist Tim Coyle’s hard-hitting “Checks and Balances” column, which has anchored the back page since July/August 2002. How hard-hitting was it? Shortly after Tim started writing it, he asked us to stop sending the magazine outside the CBIA family so he could continue calling it the way he saw it.

We took a big step at the beginning of 2004 when we unveiled a new design that Sandy and I had worked on for several months to make CB more professional. Among the new features were the hard-news “Developments” section in the front of the book and an expanded and rebranded “In the Know” section at the end of each issue to keep members apprised of happenings in the industry. We also introduced design consistency throughout the publication. While the design has been tweaked and improved on bit by bit since then, that look is still the framework for what you see in this issue.

A second major development in 2004 was that we hired a full-time editor. The magazine was averaging more than 48 pages per issue by the end of 2003, and it was hard finding time to give the magazine the attention it needed while carrying out my PR responsibilities. We hired Janelle Leader Lamb, a solid publications editor who helped us take CB to a higher level. Under her leadership we were finalists for the first time in the prestigious Western Publication Association’s Maggie Awards competition for magazines west of the Mississippi. And we expanded our coverage to such subjects as builders participating in Extreme Makeover: Home Edition, ways builders could fight back against trial lawyers and new trends in urban infill.

We took another leap forward at the end of 2005 when a new editor, Sarah Langford, came on board. Sarah had been the editor of a local weekly newspaper and she brought a lot of new ideas and energy. During 2006, we launched several popular standing features, including regular market trends articles from Hanley Wood Market Intelligence, a Perspectives column featuring a wide range of industry experts who often looked at issues from a completely new viewpoint, and a monthly Q&A with an industry legend or up-and-coming trendsetter...

It’s been a lot of fun being involved with the growth and successes of California Builder, and there’s a long list of folks to thank — too many to list here. For a full list, check the CB Web site, but I do want to recognize editors Janelle Leader Lamb, Sarah Langford, Dani Kando-Kaiser and Greg Robertson, and art directors Sandy Simpson and Deb Rasmussen for their talent and hard work over the years.

Special thanks go to Bob Rivinius, whose column ran in every issue and who was a strong supporter of the publication every step of the way, and to CBIA’s governmental and political affairs staff — especially Tim Coyle and Bob Raymer, whose work ran in both the first and last issues of CB and many in between.

Whatever the future holds, it’s been a privilege to help bring this member benefit to you over the years, and we look forward to offering you news you can use online. But it’s still hard for this former newspaper reporter to say adios if not necessarily goodbye to what we always tried to make the best association magazine in the land.

California's $10,000 tax credit helping new home builders

You've got to chalk one up for the California Building Industry Association's lobbying arm, since they definitely had a hand in crafting the $10,000 tax credit for buyers of new homes in the state. In fact, the program has been so successful that the development community has suggested lifting the $100 million cap on the tax credit program.

Yet others argue that since foreclosures are a much bigger problem in the state, creating an artificial stimulus for new home sales only prolongs the inventory correction.

I would argue that the issue is a bit more complex than that, and if we can devise a plan to help some builders limp along with a core operation until the market rebounds while also focusing even more on getting rid of existing home inventory (mostly foreclosures), then that's perhaps the optimal solution.

From a Wall Street Journal story:

California's hard-hit home builders say they're pouring more foundations and hiring more workers this spring, partly because of a state tax credit of as much as $10,000 for buyers of new homes.

Nationally, the Commerce Department said Friday that new-home sales fell 0.6% to an annual rate of 356,000 units in March, a sign the free fall in new-home sales may be over. In the West, home-builder sales rose 15%, likely reflecting a boost from California's new-home credit.

Now, less than two months after the new-home credit became available, some lawmakers in California's financially strapped government are proposing to eliminate the $100 million limit on the total amount of credits that home buyers can tap...

Despite the industry's enthusiasm, some economists say the credit is doing little to fix what truly ails California -- one of the nation's largest residential markets -- because it doesn't encourage the sale of foreclosed houses that are weighing on prices. Economists warn that if the tax credit is expanded too much, it could exacerbate the housing glut here...

Other states are considering their own subsidies to supplement the recently enacted $8,000 federal credit for certain first-time buyers of existing or new homes. But California has one of the most robust tax credits targeting new-home purchases...

The Californian Building Industry Association, which led the lobbying effort for the credit, estimates that each new-home sale generates $16,000 in tax revenue from construction workers' income, as well as from sales taxes paid on appliances and furnishings, among other home-related items...

About one-third of the $100 million tax credit allocation has been already claimed, according to the state Franchise Tax Board, which administers the program. At this rate, lawmakers expect the pool could be gone by early summer, well before the program is scheduled to end in February 2010.

For home buyers, the credits mean big savings, as home prices keep falling and mortgage rates are near historic lows. Certain first-time home buyers in California can qualify for a combined $18,000 in state and federal credits on new homes, which had a median price of $339,990 in February.

My first post for the 'Developments' blog of the Wall Street Journal

I'm very pleased to report that, after several iterations during the editing process, my first blog post for the 'Developments' blog covering California trends has just been published:

Considering the amount of overbuilding that took place in California during the boom, some type of decline was necessary in order to bring supply and demand back into balance. The latest update on California building permits shows just how drastic that decline has been.

According to statistics from the California Building Industry Association (CBIA) (full report), the number of residential housing permits issued statewide in November fell to 4,544 — a 17% drop from the same period in 2007. For all of 2008 an estimated 64,000 building permits were issued — the lowest level since records were first kept in 1954. For single-family homes alone, 2008 will likely end up with less than 32,000 permits for a state of 36 million, marking a decline of well over 50% from 2007’s already low levels. (The report covers single- and multi-family residential permits.)...

Click for entire post here.

Many thanks to Christopher Thornberg at Beacon Economics for suggesting me to the Journal. He will also be a regular (if occasional) contributor on economic trends related to real estate, so be sure to look for his posts.

Have any ideas on posts you'd like to see? Email me suggestions at info@metrointel.com.

California new home sales still sluggish in January

According to the most recent CBIA/HWMI press release, new home sales in California during January fell by 62 percent from the same month of 2007 while median prices declined by 13 percent:

The monthly CBIA/Hanley Wood Market Intelligence (HWMI) New Home Sales and Pricing Report showed that new home sales in January were over 62 percent below January 2007. While a staggering percentage decline, the drop is slightly less severe than the year-over-year decline of nearly 67 percent in December.

During January, 2,679 homes and condominiums were sold in the subdivisions tracked by Costa Mesa-based HWMI, compared to 7,109 in January 2007. Sales of single-family homes dropped by 61 percent, while sales of townhomes and “plexes” – duplexes, triplexes, etc. – were down 71 percent and sales of condominiums were down 58 percent.

Compared with the same period last year, the median base price of homes sold dropped by 13 percent.

Non-seasonally adjusted total new-home sales were 29 percent higher than levels seen in December, although it is not unusual for January to show a much faster pace of sales activity than December. Median base sales prices statewide were 0.2 percent lower than in December...

In the same release, CBIA CEO Robert Rivinius called for three different legislative measures to be passed to help expedite an eventual homebuilding recovery in California:

“First, we would ask lawmakers to pass SB 1185, which would give builders an additional two years to build on home sites approved by local officials,” Rivinius said. “Normally, these subdivision maps require homes to be completed within two or three years, which in many cases will not occur given the housing downturn.

“SB 1185 is urgently needed and has been put on a fast track in the Legislature, designed to get it enacted and in place as soon as possible. Failure to act means thousands of entitlements will expire, forcing builders to unnecessarily go through a time-consuming and expensive process to get new entitlements approved and delaying a long-awaited industry recovery. Similar legislation was passed in the mid-1990s and helped produce a seamless and uninterrupted recovery.”

He said lawmakers should also approve AB 2604, which would allow builders to pay local impact fees when a home is sold instead of when the building permit is obtained. Since these fees often total $50,000 or more per house - $100,000 per home in a growing number of communities – the bill would significantly help builders avoid a cash squeeze.

The third measure is AJR 45, a joint resolution that calls on Congress and the President to permanently increase the federal conforming loan limits and allow mortgages of up to $729,000 to be purchased by Freddie Mac and Fannie Mae, the federally backed lending giants created to ensure a reliable source of credit for homebuyers.

Want so see how the various metro markets in California performed during January? Download that here.