Jobs are vital
The path of the real estate market is determined by 26 factors, which will set the pace of our recovery from this financial crisis. Of these factors, employment has the most impact on the vigor of home sales and home pricing. A person’s income from a job (or subsidy) is required to pay for shelter, whether that shelter takes the form of single family residential housing or nonresidential space for a business, rented or owned. Only those with a source of income can afford rent or mortgage payments, and only businesses providing steady employment require space in office, retail or industrial properties for workers, inventories and production. [See first tuesday article, The Economic Restructuring of Real Estate.]Continued job lossAll indicators point toward a prolonged wait, well into 2013, before sufficient jobs begin to return to the California labor market (the market will require at least 350,000 new jobs annually to complete its recovery). Thus, we can expect a slower-than-usual recovery of full-time jobs lost and, by extension, a continuing lack of buyers and tenants for all types of real estate, with the exception of some residential rentals in coastal areas.A high rate of workers has been pushed involuntarily from full-time to part-time employment.1,440,000 CA employees in November 2011 – 9% of our employed workers – reported they were currently working part time for “economic reasons.”In addition, the majority of 2009’s massive job losses were not simply temporary layoffs; they have become permanent as reported by the Federal Reserve Bank of San Francisco (FRBSF). This premature permanent retirement from the work force will benefit landlords, not sellers of real estate.In November 2011, 33% of CA’s unemployed reported being jobless for 52 weeks (one year)or more. Our CA-located FRBSF suggests that a higher-than-normal rate of involuntary part-time work and a low and declining rate of temporary layoffs will prevent employers from wanting to hire new workers anytime soon, as they are more likely to fill new full-time positions with current temporary and part time workers. [For more information on partial employment, see the FRBSF article, Jobless Recovery Redux?.]Employers nationwide were resorting to wage cuts coupled with furloughs in order to lower costs and keep businesses open during the financial crisis, as reported in 2009 by the Economist magazine. These cuts have not since been discontinued. This trend is unlike recent recessions, since a typical recession will bring a rise in unemployment but no drop in wages.During ‘ordinary’ recessions, the wages of permanent employees generally continue to rise, but do so at a much slower rate, staying under the rate of inflation. This allows employers to cut operating costs without damaging the overall morale of their employees. But the financial crisis has brought deflation in the prices of goods and services sold, thus forcing employers nationally to drop wages and hours worked in order to compensate for their leaner sales. [See The Economist article The Quiet Americans.]As for California, an unhealthy downward trend in average weekly overtime hours in manufacturing now exists. Average weekly overtime hours have decreased 11% over the six year period ending in November 2011; not a good thing for individuals employed in manufacturing.The decline in overtime hours argues against any speedy recovery in the jobs market. Overtime hours mustincrease before an employer begins to hire additional staff. Overall, hours worked have risen somewhat over the past year, but are unlikely to show any significant gains before 2014. Until hiring picks up significantly for a period of at least 18 months, real estate sales and rental occupancies will remain stagnant.Slow to hireJobs present a trifurcated employment issue when it comes to judging the pace of a recovery:
- full employment;
- unemployment; and
- underemployment.
Full employment involves a large number of full-time (40-hour week) employees with a high amount of overtime hours (2 to 4 hours weekly). On the other hand, workers pushed from full-time to part-time (as with those employed in manufacturing and construction), shorter work weeks (as with those working for the government), low levels of temporary layoffs and low overtime all point to underemployment. Underemployment, which refers to the number of hours worked per week, is a separate phenomenon from unemployment, which refers to a permanent unpaid vacation.
However, underemployment and unemployment must both be considered in order to gauge the pace of recovery to full-time jobs, the prerequisite to a robust real estate leasing and sales market. The reason: when the economy does begin to bounce back, employers will not react to improved business by immediately hiring new workers. Brokers will have to continue to wait for some time before the next wave of families qualifies for home loans or rent.
California has begun the stabilization of employment since it added around 200,000 new jobs in 2010. However, building up to sufficient new employment – 350,000 to 400,000 new jobs annually – is an ongoing process, and will not fully develop before 2014. Employment numbers will likely return to pre-recession levels by 2016. Allow for a lag in time before any regular increase in the number of prospective buyers and tenants except for the demand for rentals created by the SFR foreclosures and shortsales. For the ever-increasing population of California (presently over 400,000 annually), the coming job recovery translates into a long period of unemployment for those who enter the labor force and do not quickly find a job, the result of this Lesser Depression. [For more information on California population, see first tuesday’s market chart, Rate of Population Growth: CA v. US]
Unemployment has remained at a higher percentage of the work force for the past two years than it has been since WWII, and it is worse in California than in the rest of the nation. The spikes in unemployment of 1983 and 1993 each took over five years before full recovery; this one will take two or three years longer, well into 2016.
In the meantime, any news of job recovery released for the nation as a whole will differ wildly from what most Californians will experience. Real estate’s recovery, too, will wait for the inevitable rise in employment.
To put it bluntly, the financial crisis will be embarrassingly long and financially troublesome for those impatient and overly-optimistic folks expecting a quick recovery – and easy profits. And unlike the “garden-variety” business recessions of recent years, this recession and its concurrent financial crisis are destined to affect the real estate market much longer than any recession since the Great Depression – sales volume will remain essentially flat through 2015.
Unemployment in California will not stabilize until well into 2015, and it will take until 2016 to regain the 1,060,800 jobs lost (as of November 2011) and return to the December 2007 peak in California employment.
Not everything is so bleak: income property prices reset more quickly, and their sales volume will pick up much sooner, since their prices are determined by a different set of calculations (capitalization rates) and attitudes about risk taking than the methods used to evaluate single family residential real estate. Buyers of both types of property will be best rewarded if, before they begin to buy, they wait for the ultimate end to this real estate recession, which will arrive just after the Fed first raises short term interest rates, following a significant reduction in trustee’s sales has taken place. [For information on trustee’s sales in California, see first tuesday’s Market Chart, NODs and Trustee’s Deeds Recorded Quarterly.]
[For the obverse side of the jobs coin, the 91% of the pre-recession jobholders who remain employed throughout California, and the role they continue to play in the state’s real estate market, see first tuesday's Market Chart, Jobs Move Real Estate.] |
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