While the drought throughout the Western US has created a lot of concern, it turns out that a number of companies and water districts were prepared, having invested in all sorts of technologies and water recycling programs. In fact, new homes and new home communities are far more water efficient than existing communities. Here is a 2-minute story on CNBC.
Here are some facts about the severity of the drought situation in California:
- Reservoirs.The 22 largest are 34% below norm due to lack of rain the last 4 years.
- Snowpack.The snowpack is 95% below norm this year, which means the reservoirs will fall further.
- Expectations.There is a 70% chance that the drought will persist according to the Climate Prediction Center used by government officials.
Water consumption is about to be cut dramatically. Farmers planted 400,000 fewer acres last year and just proposed to cut back even further. Also, residential water bills are set to skyrocket unless people cut back, so they will. I live in Irvine, California, where our water bill rose 40% last month and came with a letter telling us to expect our bill to triple by October unless we cut back drastically. We already have.
There are likely to be several impacts on the housing market:
- Less demand.I expect increased water bills to be another reason some people will delay purchasing a detached home, and job losses in the agricultural markets will hurt demand as well. Food prices will also rise for everyone.
- Higher prices.I expect new home approvals to become even more difficult, likely putting even further upward pressure on home prices unless demand slows dramatically. In the last year, median home prices have risen 8% to $418K, and median apartment rents have risen 7% to $1,364 per month.
- Increased new home market share.I expect new homes to start taking more market share. Builders will use water efficiency as a sales tool, similar to the way builders use energy efficiency in the South as an effective tool. Cost-conscious and environment-conscious buyers will respond. Also, many California homes have no yard at all, with attached housing comprising 54% of all building permits in the state and most detached homes coming on very small lots.
The short-term drought impacts clearly hurt most state residents, while the long-term benefits of improved water efficiency clearly help. If you would like more information, here is our drought report authored by our Senior Research Analyst Alex Martinez.
(c) John Burns Real Estate Consulting