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Economist sees second wave for housing rebound

The first phase of the housing market's recovery in San Diego County seems to have drawn to a close, but a second phase is coming that could breathe new life into the local construction industry and help spur growth throughout the economy, said economist Christopher Thornberg, founding partner of Beacon Economics in Los Angeles.

Although the growth rate of home prices has slowed in recent months, the housing recovery will rebound by the end of the year, Thornberg said Thursday evening at a meeting sponsored by City National Bank.

In an interview earlier in the day, Thornberg said the second phase of the housing rebound will be driven by pent-up demand from homebuyers rather than investors’ speculative purchases, which have fueled much of the recent rise in prices.

Prices won't grow as fast as they have recently, Thornberg said, but growing demand will lead to more pressure for new homes, meaning more work for builders.

"The real recovery begins when there's real growth on the construction side," Thornberg said.

There are already some signs that the rebound has begun.

After hitting a 14-year low point at the depth of the recession, construction firms have been steadily adding workers for the past two years. Until last summer, much of that growth was driven by the specialty trades, while employment in building construction remained stagnant. But since August, that sector has been growing as well, with 1,300 jobs added by the end of December.

Thornberg predicts residential construction growth will pick up steam in 2014 — perhaps by enough to cause a glut in apartment space, and commercial construction will likely grow at a slower pace, "although there are signs that things are getting better, including lower vacancy rates."

Local commercial developers charge that actions from City Hall — including an increase in the so-called "linkage fee" that they are required to pay to support affordable housing — could slow down construction growth by driving development costs too high.

Real estate and construction concerns have joined with the San Diego Regional Chamber of Commerce to campaign to overturn the fee hike through a referendum on the June 3 ballot, unless the City Council changes or scraps the increase within the next week.

Thornberg questions whether the City Council's plan to boost the fee to an average of 1.5 percent of construction costs would have a major impact on most projects.

"People often overstate the impact of fees and taxes on businesses, whether it's the linkage fee in San Diego or the gross receipts tax in Los Angeles," he said. "But if builders have to eat a fee of 1 or 2 percent, they'll figure out ways to do that."

Even so, he says the City Council is taking the wrong approach in its attempt to create affordable housing, using subsidies paid for by the linkage fee as well as funds from federal and state agencies.

"Subsidies should be the last choice for politicians, not the first choice," he said. "It just bandages the problem, which only creates more problems. They should go to the heart of the problem: What makes homes in San Diego so expensive?"

Thornberg ticks off several items that he said add to the cost of homes, including permitting fees that cost $60,000 to $80,000, and a permitting process that can take several years, rather than a matter of months.

He said some of the biggest expenses are tied to abuses of the California Environmental Quality Act, or CEQA, which can lead to lengthy court battles over whether developments are environmentally sound.

"There are often legitimate environmental concerns about new construction projects, but CEQA becomes a way of NIMBYists (people who object to any construction in their neighborhood) to hold up construction projects because they still want to live in the pastoral wonderland of 1940s California," he said.

He added that California will continue to have a shortage of affordable housing unless CEQA is reformed, especially by streamlining the amount of time it takes to go through the process.

In the meantime, Thornberg predicts a relatively good year for San Diego's economy. Thornberg said he expects jobs to grow at a faster pace in 2014 than 2013, so that by the end of the year, the county will finally have more jobs than it had at the beginning of the recession.

"San Diego has a huge advantage over other regions because of its emphasis on biotech and medical technology, as well as tourism, which has come back in a big way," he said.

On the other hand, the jobless rate will still be relatively high because the number of jobs over the past few years hasn't caught up with the county's population growth.

Thornberg also predicts that despite some stumbles over the past two months, rising stock prices on Wall Street will help fuel growth.

He said that after record-setting growth on Wall Street last year, investors have been a little more skittish this year because the ratio between stock prices and earnings — the PE ratio — is much higher than normal, which often signals that the market has reached its peak and is about to slide downward.

"As a result, any little piece of negative information that investors get might lead to a sell-off," he said.

But he still sees the market proceeding forward, partly because other forms of investment aren't producing enough returns to lure them away.

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1 UserComments
Eric S 10:47am March 13, 2014

Thornberg is right on... CEQA and NIMBYists are killing business and creating a housing shortage. The same people saying NO to new housing will be the very same people parading around demanding more affordable housing in 3 years.

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