After a decade of gains, California’s employment picture is back to square one.

California lost over 2.7 million jobs from the December 2019 peak to April 2020. This translates to a 15.4% drop, the bulk of which occurred in a single month. In comparison, the job losses experienced in response to the 2008 recession equaled a lesser 10.2% drop, a loss of 1.6 million jobs, spread out over a period of two years.

Employment is the single most important factor in determining the health and stability of California’s real estate market. Without a paycheck, households cannot pay rent or buy a house. Further, without income to provide jobs, businesses have no need to occupy and use commercial property.

Demand for real estate increases with the number of local jobs, and additions to the labor force drive up rents and prices on properties in the vicinity of job growth. For example, the Bay Area’s volatile real estate price growth is driven by demand from a booming population, lured to the area over the past 10-20 years by exciting job growth in the high-paying tech industry and other supportive industries.

On the other hand, a decline in the number of local jobs reduces the need for all types of real estate, residential and commercial alike. Decreased demand for property leads to lower rents paid by tenants and lower prices paid by buyers. Commercial vacancies are inextricably linked to residential vacancies, as individuals whose incomes are lost or reduced are forced to move in with family members or roommates.

Jobs are the key cog in the wheel that keeps the economy — and real estate market — turning. Will the real estate market keep moving as we continue to move through the 2020 recession? Or will the road prove too bumpy?

The (very) long recovery ahead

Since the biggest job losses occurred this spring, the media has proclaimed record job gains. However, these gains have thus far seen a return of just 680,600 of the jobs lost as of July 2020. At this time, jobs are still 11.5% below the December 2019 peak, and the pace of job additions has slowed dramatically from the initial rebound when shelter-in-place orders were lifted.

Optimistic prognosticators believe jobs will return just as quickly when a COVID-19 vaccine is released. But this ignores the underlying economic recession, the conditions for which existed long before the pandemic pushed the already teetering jobs market over the edge.

Some government stimulus programs, like the Paycheck Protection Program (PPP) and the Coronavirus Aid, Relief and Economic Security (CARES) Act, have attempted to keep individuals employed and provide for those who are not. But the PPP has been riddled with problems, with scammers targeting the program and many legitimate businesses failing to receive any aid before the program closed in August 2020.

On top of the problems, the stimulus we’ve seen so far has been woefully inadequate. Even in Europe, where many governments offered comprehensive stimulus programs to large companies so that everyone could continue receiving a paycheck during the shutdowns, many European companies are now announcing huge layoffs. Worse, the European Central Bank warns that unemployment will still remain high even after the pandemic subsides.

Here in the U.S., one chief at the Federal Reserve (the Fed) has said the unemployment picture will get worse the longer it takes to pass another round of stimulus funding. On the other hand, passing funds for greater unemployment benefits will not only help jobless households, but it will also help those who are secure in their jobs feel more comfortable spending.

Timing the next recovery

More time is needed before a realistic and consistent jobs recovery will begin. This recession is likely to mimic a “W”-shape in the remainder of 2020 and 2021, with conditions rising with false momentum, only to fall back when sustaining economic conditions do not emerge. The employment market won’t begin to make solid climbs until 2022 or even 2023, at which point the real estate market will begin to emerge from the recession.

In the meantime, a meaningful transition will occur in the jobs market. Many brick-and-mortar businesses will disappear for good, their customers choosing to move their purchases online. This will hurt the retail industry but give a boost to industrial real estate. Temporary layoffs will turn into permanent layoffs as the economy re-charts a course in the sudden sea change.

These shifts will ripple throughout the real estate market, causing a spurt of foreclosures and distressed sales following the end of the foreclosure moratorium on December 31, 2020 and the eviction moratorium ending January 31, 2021. It’s possible a state-initiated effort to keep Californians housed will extend these moratoriums longer, further delaying the inevitable.

Job creation is the only cure. When will that happen?

It took California nearly a decade to catch up with pre-2008 levels when counting working-age population growth. During that elongated recovery, home sales volume never rose above 61% of peak Millennium Boom volume.

Unless we want to spend the next ten years in a similar malaise, we will need more jobs — now. More infrastructure and federal jobs, as well as federal stimulus for private businesses are necessary. Otherwise, we will see a repeat of the last ten years of elongated, bumpy recovery.