A cautiously optimistic light was thrown on the economic recovery of the Riverside-San Bernardino area at a convocation of local economists, real estate professionals, financial planners, civil engineers, title company representatives and business students titled the Annual Inland Empire Economic Forecast Conference held in Riverside California on November 3, 2011, at the Riverside Convention Center.

Chris Thornberg of Beacon Economics (Beacon) confidently affirmed no double-dip recession lies on the national horizon. While recovery may not be occurring as rapidly as we would like, Thornberg declared the prospect of an imminent national recession dramatically espoused by the media is “nonsense.”

Brad Kemp, another economist at Beacon, focused his forecast specifically on California and the Inland Empire in particular, which is of the greatest concern to us. Kemp claimed the state’s housing market is healthier than it has been in many years, citing a downward trend in the number of defaults and foreclosures statewide.

Kemp asserted construction of single family residences (SFRs) will pick up in 2012 since California has one of the lowest housing vacancy rates in the nation (5.3% for renters and 2.3% for homeowners), signaling that much of the excess builder’s housing inventory (close to 80% by Beacon’s estimates) has been cleared out.

The cornerstone of this Economic Forecast Conference remains the same from years previous: patience while demand is building. The California recovery is moving at a slow pace, but the state’s economic situation is undoubtedly improving.

first tuesday take:  first tuesday agrees with Beacon’s overall economic viewpoint but places California’s housing market recovery a few years further away. Although we all use the same data, it seems Beacon is reading the tea leaves with a different bias than we are.

California’s housing recovery suffers from a simple lack of a true jobs recovery. Momentum will not take hold until around 2016 with 400,000 plus new jobs created here annually.  We have only picked up 200,000 additional jobs during the past year through October 2011 and have to recover an additional 1,300,000 before we are back to the December 2007 peak.

Also, there is insufficient business strength (read: demand) to reach 400,000 jobs annually for another couple of years.  January 2012 jobs numbers will tell us a lot about the hiring trends of businesses for the long haul and what is needed to get this recovery off the bumpy plateau we currently experience. [For more information regarding California employment, see the first tuesday Market Chart, Jobs move real estate.]

Construction starts will also increase at a much slower pace than projected by Beacon. SFR starts will peak at the end of this Lost Decade, fueled primarily by Generation Y (Gen Y) home purchases, with the assistance of home sales and replacement purchases by their belatedly retiring Baby Boomer (Boomer) parents.

Currently, Gen Y remains bridled by low employment and stuck in rental or cohabitation living arrangements. Unlike the 50,000 annual construction starts of the 1990s fueled by Boomer demand, we predict only 20,000 starts for 2011 and another 20,000 (but with great underlying buying strength) for 2012. Until Gen Y is employed, construction activity in California will not run to 1990 recovery numbers. [For more information regarding construction starts, see the first tuesday Market Chart, CA single- and multi-family housing starts.]

New and resale home sales volume will continue to plateau around 105,000 sales per quarter, and may even drop due to the gradual reduction in activity of speculators and builders/renovators purchasing real estate owned (REO) properties to flip them. The end of the default and foreclosure influx will not occur until around 2016. [For more information about REO properties, see the first tuesday Market Chart, REO resales in CA.]

Although the pundits at Beacon were quick to declare media coverage of the Lesser Depression to be “nonsense,” Thornberg espoused some nonsense of his own. The venerable economist claimed the problem with California housing is that prices are still too high, and then went in the same breath to say that we have yet to experience a true recovery in the housing market due to crippling negative equities.

If prices were to drop, thus stimulating demand and facilitating consumption, equities will diminish in kind, further compounding California’s negative equity ills evidenced by the inability to sell and rid owners of their black-hole assets. Beacon only has it half right: negative equity is the reason for stagnation in the housing recovery. However, it is not the cause of the housing market’s lingering distress. Rather, it was the inflated prices resulting from the financing excesses allowed to exist since 1982 that brought us into the Millennium Boom.

California home prices are just now approaching the equilibrium trendline for pricing, on their way to bottoming-out before their fateful return to the California mean price. This means something must be done about the negative equity plague irrespective of home prices. Bucking the money illusion of boom period prices will be a necessity for brokers and agents, as prices are likely to remain where they are (or lower) going forward and will only rise with the rate of consumer inflation for years to come. Think the 1950s following the Great Depression and WWII. [For more commentary on real estate pricing represented as the historical equilibrium level to which prices cyclically return, see the October 2011 first tuesday article, The equilibrium trendline: the mean-price anchor.]

The next few years will be more of the same. Real estate agents can prepare for future earnings from Gen Y homebuyers by building a public image anchored in honesty through up-front disclosures of property conditions. The post-recovery housing market in the new real estate paradigm emerging from our Lesser Depression will reflect more prudent spending by buyers and a return to fundamentals – a good thing for everyone who is patient.  None of this is going to happen quickly.

What can local and state governments and business owners do to create more jobs and spur recovery? Let us know with a comment!