California’s already tight housing market is facing another long-term complication: drought.
The state’s dry spell is creating challenges for developers at a time when home prices are soaring because of limited inventory. The metropolitan areas of San Jose, San Francisco and San Diego had the nation’s biggest gap between the number of new jobs and residential building permits from 2012 to 2014, according to a report Wednesday by the National Association of Realtors. Now the drought, into its fourth year, stands to curb affordability further.
“It’s contributing to price appreciation by restricting supply,” said Mark Boud, founder of Real Estate Economics, a housing-consulting firm based in Irvine, California.
Developments in areas such as Newport Beach, a tony Orange County town where the median home price is $1.59 million, have been caught in the crosshairs of environmentalists seeking to limit new building. In the San Francisco Bay area suburb of Pleasanton, a proposal to rezone an industrial area for residential use was shot down because of the drought.
Other communities already under way are being hurt by limits to water usage, such as Mountain House, a planned development for 15,000 homes about 61 miles (98 kilometers) east of San Francisco. Its biggest investor is the California Public Employees’ Retirement System, the largest U.S. pension fund.
The State Water Resources Control Board threatened to cut off the water supply to Mountain House in June and sales briefly slumped 70 percent as concern grew that taps might run dry, according to John Burns Real Estate Consulting. The development found a water source through the end of this year but still seeks a long-term supply, said Edwin Pattison, general manager of the Mountain House Community Facilities District.
“Other communities are going to be scrambling for water too,” he said.
That may limit opportunities for homebuyers seeking to escape the high costs of San Francisco or Silicon Valley. In the second quarter, only 20 percent of Bay Area residents could qualify to buy a home at the median price of $841,560, according to the California Association of Realtors.
Last October, the drought prompted the water resources control board to order a moratorium on new connections at 22 of California’s 7,500 water districts, with more expected this year, according to Andrew DiLuccia, an agency spokesman. The National Weather Service raised the prospect of a Pacific Ocean warming event, known as El Nino, to 95 percent on Wednesday, but said increased precipitation is unlikely until late this year or early 2016.
Calpers, which lost about $1 billion on its stake in Mountain House during the housing crash, is working to protect its investment again, spokesman Joe DeAnda said in an e-mail.
“We are actively monitoring the situation in Mountain House,” he said. “Calpers investment beliefs call out natural- resource scarcity as a risk that needs to be managed well, with water in California being a prime example.”
Governor Jerry Brown in April declared a drought emergency and ordered water-use reductions amid plummeting reservoir levels and a record-low snowpack. In Newport Beach, south of Los Angeles, environmentalists seized on the governor’s order as an additional reason to try to block 1,375 new homes proposed for Newport Banning Ranch.
“How is this city going to provide water for all this additional development when we’re being required to cut back?” said Steve Ray, executive director of the Banning Ranch Conservancy, which wants the former oil field turned into a nature preserve.
The Newport Banning Ranch homes will include water-saving features such as cisterns to capture rainwater, tap-water reuse and landscaping that reduces the need for irrigation, also known as xeriscaping. The California Coastal Commission is scheduled to review the project in October.
The drought is leading to “a more rigorous” approval process, said Mike Mohler, senior project manager at Newport Banning Ranch, which is backed by Cherokee Investment Partners and Aera Energy LLC.
Amenities in new homes to address the drought also contribute to homebuyer costs. Pipes that divert used or “gray” water from appliances, sinks and baths to irrigation systems add about $7,500 to home-construction prices, according to Susan Dell’Osso, project director of River Islands, a community for 11,000 homes east of Mountain House, which will include the systems in new residences this year.
“We’ll have to see how people react to the extra cost,” said Dell’Osso, whose home prices start in the “high $300,000s,” or less than half the San Francisco Bay area median.
Even while espousing conservation, River Islands uses its multiple sources of water as a marketing tool, wooing shoppers wary of Mountain House, which is about a 20-minute drive closer to San Francisco, Dell’Osso said.
In June, the city council in Pleasanton, a city of 70,000 between Mountain House and San Francisco, voted to abandon a proposal to rezone a 1,000-acre (400-hectare) site used by the water district, a trash transfer station and former quarries into an area for residential use.
“The drought was the No. 1 reason,” Brian Dolan, Pleasanton’s assistant city manager, said in a telephone interview. “Particularly at a time they’re asking everybody to reduce water use by 25 percent.”
Homebuilders argue that new houses use less water than older residences because codes require features such as low-flow showers and toilets.
“We’re not the problem here,” said Dave Cogdill, chief executive officer of the Sacramento-based California Building Industry Association. “Housing demand continues to grow and supply doesn’t.”
At Mountain House, 189 homes sold in the eight months through August, as strong sales at the start of the year offset the July drop in orders. Demand from homebuyers and builders seeking lots, including Standard Pacific Corp. and Tri Pointe Group Inc., has recovered since a temporary water source was found, said Geoffrey Le Plastrier, president of project manager Mountain House Developers.
“I couldn’t say it’s a canary in the coal mine,” Le Plastrier said in a telephone interview. “But I do think this whole issue has raised the sensitivity of builders and developers to something that they’ve probably taken for granted for a long time.”
© Copyright 2023 Bloomberg News. All rights reserved.