• the amount saved for a down payment;
• his annual income from all sources;
• a lender’s willingness to lend to the homebuyer; and
• any available government promises of subsidies for the purchase.

Of all the factors affecting the real estate economy, however, employment throughout California’s population has the most impact on the vigor of the real estate market, whether in good economic times, times of financial crisis or economic recession.

Without jobs, wage earners have no financial ability to make rent or mortgage payments. Thus, the unemployed are financially unable to occupy any type of residential property. Also, without work to provide jobs, businessmen have no need to occupy and use retail space, office suites, warehouses for inventory and distribution, industrial buildings for production or land for development.

Demand for all types of real estate rises as the number of local jobs increases (as during periods of economic development or boom). Additions to the local labor force tend to drive rents and prices up on properties in the vicinity. On the other hand, a decline in the number of local jobs reduces the need for all types of real estate (as during a recession).

Reductions in local employment lead to lower rents and prices paid by tenants and buyers for the occupancy and use of real estate. The current trend of individuals employed in a region sets the direction for:

• the volume of rentals and sales in the local real estate market during the following 12 to 18 months; and

• the movement of rents and prices paid for the use and occupancy of all types of real estate in 24 to 30 months.

Other jobs issues which affect the level of rents and prices paid for property include:

• quantity of employed individuals;
• quality of jobs available; and
• type of jobs existing and developing in the local market.

Quantity of employed individuals

Historically, jobs in California create homeowners and tenants on an approximate 50:50 basis, with half of all households owning the residence they occupy and the other half renting it.

The appreciation or depreciation of property values is triggered by increases or decreases in local population density and the economics of the jobs (read: numbers and pay levels) held by the local population. The unemployed, the under-employed, and the rate of unemployment are of no concern to the present real estate market, since these populations do not rent or buy real estate — they first need a full time job to do so. [For an analysis of current unemployment levels and labor force participation, see the first tuesday Market Chart, CA unemployment as a percentage of labor force.]

The charts above track the single most important factor in determining the past and future of real estate in California: the number of people employed from time to time. These charts review total employment numbers statewide and individually for California’s five most populous counties at the time of publication. The gray bars in Figure 1 indicate periods of recession in the United States Economy (as tracked by the National Bureau of Economic Research).

First nonresidential, then residential

As of August 2011, California had 8.7 million single family residential (SFR) units and 14 million individuals employed. [Data courtesy of California Department of Finance and Labor]

Thus, California has two thirds as many homes as people on payroll. More meaningfully, 56% of households in California own the home they live in (the percentage peaked in 2006 at 60% and is gradually heading to 55%, California’s historic point of homeownership stability. It will most likely drop well below that number to around 50% by 2016). Most homeowners are employed.

When the number of payroll jobs in California drops, it is easy to draw the conclusion that with every ten jobs lost, five or six people will not be able to purchase a home or retain the home they already live in (unless they have cash reserves). The remainder simply cannot afford to pay rent and will lose their housing. The reverse occurs when payroll numbers increase. [For more information and analysis of the role the job market plays in real estate, see the September 2009 article, “Future Sales and Occupancy Rates Rest on Job Losses and Part-Time Workers”.]

The loss of jobs has a ripple effect on all types of real estate beyond SFRs. As employees are shed causing the number of jobs to decline, the need for office space, commercial space and industrial space is reduced by an equal or greater amount. Subleases, reduced rents and vacancies across all segments of California’s real estate economy are the direct results of job loss. The good news going forward is that the worst period of job losses ended in mid-2010, following the bandwagon surge to lay off employees early in 2009.

Employer of last resort

As in any recovery from a recession, the crisis of 2010 required the government, as the “employer of last resort,” to continue working to stabilize job loss and then promote job growth. Two stimulus packages were enacted by congress: one for jobs in mid-2009; the other in December 2010 as a tax reduction for those on payrolls. Businessmen only respond to demand for their goods and services — and no sufficient demand existed in 2009 and 2010 to incite them to hire more employees.

Thus, without government intervention the jobs market would not have stabilized when it did. More, much more, is now needed to create buyers for everything, real estate included. Those who continue to demand austerity from the government risk prolonging the recession. [For more information on the role of government action in the economic recovery, see the March 2011 article, Home financing, mortgage-backed bonds, and the Fed.]

While readers observe payroll data as reported by the media or others, they must be certain to distinguish between what is happening to California jobs and what is taking place across the rest of the nation. California took a disproportionately greater hit to jobs during the Great Recession in comparison to the national averages. The magnitude of California’s real estate bubble exceeded those of all other states (except Nevada and Florida) in terms of price, lending, construction, speculation and anticipation of demand.

The recession’s continuing impact on the real estate recovery will be equally severe, as we correct for the recent past’s excesses and regulatory groundwork is laid for stable, long-term job growth. What happens in a commodity economy such as Texas, and in every other state, has little relationship to what happens in California, a state defined by much more than the continental divide.