New-home construction in California is expected to continue cooling off for the remainder of 2006 as the housing market adjusts from a superheated state to more normal conditions, but production this year is still expected to be the fourth-highest in 17 years, according to the midyear housing forecast issued Wednesday by the California Building Industry Association.

CBIA Chief Economist Alan Nevin said he now expects overall housing starts in California this year to total between 170,000 and 180,000, down 15 percent to 20 percent from 2005.

Multifamily construction remains extremely strong in most markets and is expected to total between 45,000 and 55,000 units — about the same as last year’s levels — but single-family starts are expected to drop to between 125,000 and 135,000, compared to nearly 155,000 in 2005 Nevin said during a press conference at the PCBC home building show in San Francisco yesterday.

“In the Bay Area, Orange County and in the Los Angeles Basin, we see continuing strength in multifamily construction, most of it higher-density condominiums in the urban core,” Nevin said. “Most other markets are holding steady in multifamily units, with the exception of San Diego County, where development has declined markedly, predominantly because of a near-total cutback in downtown high-rise development.”

As for the decline in single-family permits, he said production remains solid in most of Southern California, but starts are likely to be significantly below last year’s level in San Diego, the San Joaquin Valley, the Sacramento region, and the Bay Area.

“The decline in single-family production in those areas is the result of a combination of rapid price run-ups in the upscale market and rising interest rates,” he noted.

Nevin also projected that prices will continue leveling off in most metro areas, with home prices overall expected to increase by less than 5 percent statewide.

He continues to believe that housing generally and new homes in particular have returned to a normal market, where buyers have choice and sellers have to price their properties right in order to sell them.

“Demand remains strong, but homes have to be priced right,” he said. “The rapid run-up in prices is over but we do not see prices dropping significantly if at all. In the resale market, there is a large amount of inventory, but much of that is due to the fact that many sellers are pricing their homes based on the appreciation we’ve seen in the past few years. Homes that are priced appropriately based on today’s market are still generally selling within four to six weeks, which is a classic definition of a normal market.”

Nevin expects that the market to stabilize by the end of the year as existing inventory levels decrease.

Production is expected to remain strongest in the Inland Empire, with between 45,000 and 49,000 total housing starts forecast, followed by Los Angeles County (26,000-28,000), the Bay Area (22,000-25,000), the San Joaquin Valley (22,000-24,500), and the Sacramento region (15,000-17,500).

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