This article analyzes the role of jobs as a factor in the state of the real estate market.
We are in a financial crisis, the infrequent train wreck of economics.
A business recession and a financial crisis produce dramatically different results. A business recession is a normal market ebb guided primarily by the Federal Reserve in a calculated effort to maintain long-term business growth without excess inflation or job loss. A financial crisis is the symptom of a damaged market, crippled by poor regulation, bad business, and corrupting financial policies. The economic woes associated with a financial crisis are much more severe than those of a recession, running beyond the abilities of the Federal Reserve.
By these parameters, our national and California real estate economies are in a financial crisis, not a routine recession.
Jobs are vital
The real estate market is affected by 26 factors which will pace our recovery from this financial crisis. Of the 26, the jobs factor has the most impact on the vigor of the real estate market. A person’s income from a job (or government subsidy) is required to pay for shelter, whether that shelter takes the form of a family residence or an industrial warehouse, be it rented or owned. Only those with a job (or government subsidy) can afford rent or mortgage payments, and only businesses providing steady employment require space in commercial or industrial real estate for workers and inventories. [See first tuesday article “The Economic Restructuring of Real Estate”]
Continued job loss
A number of indicators point towards a continuing loss of jobs in our California labor market. Thus, we can expect a slower than usual recovery of full-time jobs lost and, by extension, a loss of buyers and tenants for all types of real estate. Indicators from the Federal Reserve Bank of San Francisco (FRBSF) show a high rate of workers have been pushed involuntarily from full-time to part-time employment, with part-time increasing from 3.0% in December 2007 to 5.8% in April 2009, in effect doubling. At the same time the FRBSF find the job losses are not simply temporary layoffs, they are permanent.
Temporary layoffs made up 12.8% of the unemployed population in December 2007 at the peak of California employment. By April 2009, temporary layoffs dropped to 11.9% of the unemployed population. The FRBSF suggests that a higher-than-normal rate of involuntary part-time work and a low and declining rate of temporary layoffs projects employers’ hesitance to hire new workers anytime soon. [See the FRBSF article “Jobless Recovery Redux?”]
The Economist reports that nationally (but not yet seen in California) employers are resorting to wage cuts coupled with furloughs in order to cut costs and keep businesses open during the financial crisis. This trend is unlike recent recessions since a typical recession will bring a rise in unemployment but no drop in wages. During recessions, wages continue to rise, but do so at a much slower rate in order to stay under the rate of inflation. This allows employers to cut operating cost without damaging the overall morale of their employees. But the financial crisis has brought deflation in 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, the Employment Development Department (EDD) reports a downward trend in average weekly overtime hours in manufacturing in the state. EDD data shows a 31.8 % decrease in average weekly overtime hours in July of 2009 as compared to July of 2004 for individuals employed in manufacturing. [See the EDD’s California Labor Market Review for July 2009, pg. 7]
Slow to hire
Jobs present a bifurcated issue for judging the pace of a recovery: full employment or underemployment. Full employment involves a high level of full-time employees with a high number of overtime hours. On the other hand, workers pushed from full-time to part-time (as with those in manufacturing and construction), shorter work weeks (as with those working for the government), low levels of only temporary layoffs, and low overtime all point to underemployment. Underemployment is a separate issue from unemployment. Underemployment means hours are cut, and unemployment means 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 requisite to a robust real estate rental and sales market. The reason: when the economy does begin to bounce back, employers will not react to improved business by hiring new workers, and thus provide brokers with more families qualified for home loans and rent. Employers first reinstate part-time workers to full-time work, and then push full-time workers into overtime. Only when workers have reached their maximum work hour limits will employers hear complaints and begin to hire new employees.
A long road ahead
When California job loss begins to decelerate as it is now doing, be happy the loss of current and prospective tenants and buyers will slow and eventually stop, but resist the temptation to cheer. The stabilization of employment without further net job losses in California will be followed by a long period – up to five years – of stagnant job creation, and little annual increase in the number of prospective tenants or buyers. And job stagnation for the ever-increasing population of California (400,000 plus annually) really translates to job loss for those individuals entering the labor force and not finding a job.
To put it bluntly, the financial crisis will be embarrassingly long for those impatient and overly-optimistic folks expecting a quick recovery. And unlike the “garden-variety” recessions of recent years, this financial crisis will affect the real estate market much longer than any recession since the Great Depression. Job loss in California will not end until well into next year (at the earliest!), and it will take four to six more years to regain the 1,100,000 jobs lost and return to the November 2007 peak in California employment. A long road to real recovery, reduced vacancies, and increased home sales volume.
But income property prices reset more quickly and their sales volume will pick up much sooner as their prices are determined by a different set of calculations than those used to price homes.