As we wrote in January, the real real estate killer and story this year will be unemployment. It’s now up to (at least) 9.8 percent in the U.S. and 10.1 percent in San Francisco county.
∙ SocketSite’s Residential Real Estate Outlook For 2009 [SocketSite]
∙ U.S. Economy: September Job Losses Exceed Forecast [Bloomberg]
∙ U.S. Unemployment Probably Higher Than Reported, Silvia Says [Bloomberg]
∙ San Francisco County Unemployment Up To 10.1 Percent In August [SocketSite]
I do so try to tell the ex-gf that she ought not perhaps to sit on her unit over the Winter in the hopes that the good times return so she can fetch a higher price…
And 10.1 percent was the central point in that argument…
‘Tis but a scratch! I guess…
Come on, demand doesn’t matter!
Sarcasm aside,
You could also blame the fact that most home sales are entry level and are being sold by banks, so there are no “move-up” buyers that can afford expensive homes in expensive areas like the peninsula.
“It’s just a flesh wound!”
I do so try to tell the ex-gf that she ought not perhaps to sit on her unit over the Winter in the hopes that the good times return so she can fetch a higher price…
And 10.1 percent was the central point in that argument…
‘Tis but a scratch! I guess…
Consensus is that peak unemployment will be in 1Q 2010. That means within a maximum of six months employment will be increasing.
Plus I expect major govenment intervention in the housing markets to continue in 2010 (extending tax credits to first time buyers…coersion of existing lenders into loan modifications to reduce defaults, etc.)
Um, peak unemployment can mean that people move to other areas to find new jobs or drop out and give up. I doubt you are going to see much job creation in high cost areas like this one. Very few business owners expect the economy to come roaring back.
The unemployment rate can fall here just because the unemployed will move away faster than they are now.
Consensus is that peak unemployment will be in 1Q 2010.
Consensus among whom? Realtors? Even the fed predicts increasing unemployment until Q3 2010 – and the Fed’s predictions have been falling short of reality all year!
http://2.bp.blogspot.com/_pMscxxELHEg/SsX-vnDQ8xI/AAAAAAAAGfU/ZqokSfGZbSk/s1600/StressTestUnemploymentSept.jpg
That means within a maximum of six months employment will be increasing.
Even if the unemployment rate is dropping from 10.4%-11%, it will be well above normal levels for quite some time. A minimum of 9-12 months to get back to were employment was 21 months ago, before the big dropoff:
http://4.bp.blogspot.com/_pMscxxELHEg/SsXzzDSUSqI/AAAAAAAAGfM/PWX-2daRZ0w/s1600/EmploymentJobLossesRecessions.jpg
tipster said: “I doubt you are going to see much job creation in high cost areas like this one.”
That’s not entirely true. San Francisco has a highly productive workforce despite being a high cost area. This is the same reason that NY remains a financial capital, even though it’s a high cost area (cf. London/Hong Kong) — it’s a highly productive place for finance. I think this is one thing that ideologues forget when they complain, for example, that high taxes in CA keep businesses out. Taxes are but one factor, and having a highly productive workforce is also an important factor.
Obviously, you should do your own independent analysis of the factors this economist considered, but check out this article, which summarizes a UMich economist’s article:
http://finance.yahoo.com/real-estate/article/107235/10-pricey-cities-that-pay-off.html
I don’t think anyone should be surprised by the state of the economy. We had the mother of all bubbles, and it lasted 5-7 years depending on how you mark the beginning. Did anyone really think the entire mess would be cleared up in just 18 months?
It’s amusing as someone working in Michigan the above economist stresses climate considerations in almost every city (region) on his list. He’s absolutely right of course, but that hasn’t changed recently.
Gotta love google: He got his PhD from UC Berkeley, San Francisco in 2007 🙂
That means within a maximum of six months employment will be increasing.
and/or the unemployment checks will stop coming. Either way, the reported unemployment figure goes down.
FWIW, I think the fortress areas will survive reasonably well, there’s enough old money and active rentierism that draws income from all over the world to support their lifestyle here. What happens happens at the margin, which creates a price gradient that gradually pulls prices down across the board.
Clearly, for the lower 4 quintiles of the market it’s only the 5% interest rates that are supporting present prices above 2001-2002 levels. If & when mortgage rates go up, housing prices will more closely track equivalent rents.
Home prices are simply a function of area wages and macro interest rates. Both are on negative trends for housing increases.
While the 10.1 percent level is daunting, it doesn’t break out the level based on education, which in CA as a whole is closer to 2% for those with a college degree.
You need to focus on how many white collar workers are unemployed (and looking) when you talk about who will be buying in SF, not the barista who was fired because he went to burning man instead of showing up for work.
Jimmy C — any proof for the 2% figure? I mean, even the 10.1% figure is low, first of all (U3 vs. U6). So I’d be interested in this.
if it’s only 2% for those with college degree in these sucky times, what was it during good times then, 0%?
any proof for the 2% figure?
Using:
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/03/AR2009010302143.html
as a datapoint, which states that the national UE for college grads was 3.1% a year ago, I’d say that 2% now would be wishful thinking. SF-O has lost 100,000 jobs (5%) over the past year, not all of them barista positions.
Underemployment of recent college grads is well over 50% now, and that certainly needs to be thrown into the hopper when discussing the outlook for rents and home values.
I saw this first-hand in 1992 coming out of school, and was able to take off to Tokyo and get a job there (they were imploding then much like we are now but I was rather oblivious to economics at the time).
Total employee compensation peaked at $8T in Q308, it’s now declining at $100B/quarter.
SF is a knowledge economy (at the high end) and as such is not very inflation resilient, compared to the resource and manufacturing tiers of the economy.
Tokyo real estate got ahead of itself in the late 80s, AFAICT we’ve done the exact same thing at a very similar scale and will face the same consequences. It’d be a lot worse in Tokyo now but for their bank giving out 3% 30-year fixed mortages. That can support almost any market 🙂
I sat through all the ups and downs of the 70s, 80s and 90s and now this one. The recession of 1990-1991 offocially ended before 1992 but the pain, including unemployment lagged long after the “official” end of recession with real estate remained in a major slump till latter part of 1996. That was almost five years after we were supposed to be into the recovery. Given that the cycles are now more compressed but why should everyone be so surprised that the recovery lasts more than a couple of years ? This recession feels not that different than the 1991 recession – the so called “white collar recession.”
“Tokyo real estate got ahead of itself in the late 80s, AFAICT we’ve done the exact same thing at a very similar scale”
====
That’s the funniest thing I’ve read all week. Not even in the same universe!
At the peak, Ginza district prices were 100MM yen a sq meter (~$93,000 a square foot).
This recession feels not that different than the 1991 recession
In 1991 the 2.5B people of India and China weren’t our major trading partners -slash- job stealers and gas was $1 a gallon.
Back then Japan Inc was the present threat, which I suppose China Inc. has taken over for.
Looking at this chart:
http://research.stlouisfed.org/fred2/series/MZM?cid=30
Money stock was rather flat heading into 1990, around $2T for all of Bush I’s term. Coming into the present difficulty, MZM has NOT been held in check since 2000; it was $5T going into the dotcom crash and allowed to expand to $8T as of 4Q07 (when the recession officially started) and has already been boosted another $1.5T during the present recession.
Now, I am far from the typical Ron Paul glod-head Dr Doom one encounters on the internet but AFAICT we’ve been de-fibbing the economy to mixed effects.
The 1991 recession was also partially caused by the peace dividend and rather significant cuts in many defense programs. We are presently spending $800B/yr — that’s EIGHT MILLION well-paid $100k/yr jobs — on “defense” and should we start scaling back on that sector there will be even more hell to pay going forward. Luckily, California has already been stripped of most of its defense work but there’s still a rump to lose down here in Sunnyvale.
I have no idea how this is going to play out next decade; too many people and not enough productive employment is what I see. There were 50M inhabitants in the West in 1990 and around 75M now, and I’m not convinced that our economy is any stronger now than then. With computerization, the internet, and even Windows XP desktop, and the web 2.0 stuff we’re a lot more productive these days of course but that’s only one dimension of the analysis.
In short, 我学习中文.
Ginza district prices were 100MM yen a sq meter (~$93,000 a square foot).
I don’t know the particulars of Ginza CRE overall but the often-quoted corner of Ginza was a trophy commercial property.
Tokyo was in an insane bubble in the late 80s:
http://www.doctorhousingbubble.com/wp-content/uploads/2009/01/comparing-housing-bubbles-debtdeflation.PNG
but even so the shakeout didn’t start until assets were 300% level in 1991 and continually deflated down to 100% baseline by 1999.
Case-Shiller says SF peaked at 220 from the 70 baseline of the mid 90s.
http://www.burbed.com/wp-content/uploads/684402405_caseshiller20080527.png
Renormalizing to 100 gives us a 328 peak for SF, exactly where Japan residential peaked in 1989.
Dunno about that Jimmy C. There were plenty of blue collar workers that bought homes in SFO with their option ARMs and what have you. We’ll see where that ends up…
“Given that the cycles are now more compressed”
Outsider — why do you think cycles are more compressed now? If anything, I see this 2007-2010 “cycle” to be an extended portion of the 2001 recession. In other words, but for the credit bubble, we never came out of the 2001 recession; it just looked like we did because of the credit bubble.
For example:
http://www.nytimes.com/2008/04/09/business/09leonhardt.html
Median income in 2007 was $60,500. Median income in 2000 (in 2007 dollars, i.e. inflation-adjusted) was $61,000. It is unprecedented for an economic expansion not to top the previous peak, which leads me to wonder if we ever had one.
Troy, the following is probably a more relevant graph than the one you identified, don’t you think?
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=MZM&s%5B1%5D%5Btransformation%5D=pc1
What was domestic GDP in 1990 v today’s $14 trillion?
There is nothing wrong w/Ron Paul’s analysis. I believe Paul’s bottom line is that the United States economy and its citizens would be much better off financially and socially without a Federal Reserve/Treasury that grossly distorts the natural rhythm of supply and demand and only compounding the downside effects of economic cycles.
I agree with corntrollio!
As of 4Q03 the nation had $7.2T in outstanding mortgages and $2.1T in consumer credit for a total indebtedness of $9.3T. The credit cycle peaked in 1Q08, with $11.2T, $2.5T, and $13.7T total indebtedness.
Pumping almost $5T into the economy via debt expansion over 5 years WILL give you a functional economy. That’s a flow of $1T per year, or 20 million $50K/yr jobs.
Back in 2007 I was saying a minimum of 10% ($500B) of this new debt was certainly going bad, 20% ($1T) probable, and 30% ($1.5T) not inconceivable. I was optimistic.
the following is probably a more relevant graph than the one you identified, don’t you think
Maybe. Our population/labor base isn’t growing at a 5% clip so annual changes in wealth are somewhat misleading (in understating the compounding effects of monetary expansion).
I didn’t mean to slam Dr Paul. I don’t think anybody knows anything with respect to good economic policy going forward.
oops, change “annual changes in wealth” to “annual changes in money supply”. Money is most certainly not wealth!
Troy — also, inflation should be measured with what people think of as “money supply” as well as credit. If anything, credit is probably dropping now, while “money supply” is taking its place. Overall, I’m not sure if looking solely at that MZM chart tells the whole story on inflation because you still have to look at credit destruction.
As Mish said (not that I always agree with him or his shrill tone):
“Those who stick to a monetary definition of inflation pointing at M3, MZM, base money supply, or even Money AMS, are selecting a definition that makes absolutely no practical sense. Worse yet they do it screaming about bond-bubbles at yields of 5% or higher, all because they refuse to see or admit the destruction of credit is happening far faster than the Fed is printing.”
http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html
So to clarify the 2% unemployment average for college graduates. There is an error margin which could push it up, but closer to 3% and nowhere near the 10% number. The error is that the info provided in the applications is voluntary and therefore unreliable to a point.
The reason that SF in generally lower than the metro area, the state and the nation, is that SF is transient in nature. If there are no jobs, people will leave vs. if you are an unemployed college graduate in Chicago and your family is there and have haven’t gone much further than college in Carbondale… you’re going to stick it out. People here will leave as we’re seeing now with a reduction non-latino population totals.
The unemployment number don’t have as much to do with home values as much as loan rates and more importantly availability of funding, especially at a 90% and up LTV.
Employment will never be at 0% for college graduates… some are lazy, some don’t want to work, some just aren’t that smart…. college degrees do not always mean hard working.
^ Oh brother.
San Francisco County Unemployment Up To 10.1 Percent In August. https://socketsite.com/archives/2009/09/san_francisco_county_unemployment_up_to_101_percent_in.html
Unemployment rate vs. education level: http://www.calculatedriskblog.com/2009/06/unemployment-rate-and-level-of.html
Deflation anybody? I think many are missing the real threat here. With that looming over your head, why in the world would you go buy a house – or worse yet, a condo – right now? Of course, if you can get a 3.5% FHA loan, and walk away from the property if the market tanks some more, then it might be worth the risk, but 20-25% down? well, thats just downright crazy.
You are better off waiting until things start to stabilize. I don’t think anybody can say we’re at that point right now. And the equity markets might turn here again in the next few weeks — then what?
Lot’s of real estate killers ahead:
-Unemployment. Even IF the unemployment rate improves in the near term,the quality of new jobs will be low (i.e. much lower paying).
-The general oversupply of houses.
-Banks will continue to keep a tight grip on their government bailout money (TARP and other sources).
-Still a boatload of mortgage resets ahead (and no, we aren’t talking about just the sub prime type).
-The old axiom ” the trend is your friend” still holds true. This means that real estate will be relatively less attractive to investors.
Better stop here since I’m way out of my depth on this topic :)…
The general oversupply of houses.
There’s no oversupply in the fortress areas. I wouldn’t mind buying in Los Altos but they stopped subdividing the land there before I was born. Premium areas will be way, way above rents since demand from the independent-wealthy will safely exceed the limited supply.
Ca. 2001 a friend’s neighbor’s house went on the market in Los Altos for $700K. I thought it was high at the time (who can afford that?) but now prices are easily double that, partially thanks to low interest rates but also that millionaires need a place to live, too, and you can’t do much better than Los Altos.
you can’t do much better than Los Altos
well, you can in Old Palo Alto, Central Menlo Park, Portola Valley, Atherton, Woodside and Los Altos Hills, but, yes, prop 13 has made supply tight even in these tough times
So I am not so sure that unemployment will corilate to price drops in SF. This article over on huffington post mirrors my own personal experience.
That highly skilled job openings are still tough to fill and that those people with the right skills are still making good salaries and are relatively uneffected by this recession.
At my own consulting firm we are closing gigantic deals and are consitnatly scrambling to staff them. Sub contractors are receiving multiple offers and seem to be able to pick and choose between oppurtunties.
Now obviously the recession and unemployment IS having an impact on prices. However, I am no longer convinced that this recession will hit the skilled workers in the bay area nearly as hard as I feared previously. And as those indivbiduals feel more confident they are more likely to purchase helping to prop up prices.
For the first time I am thinking this may be the bottom. Not that prices are going anywhere fast but that the bleeding may really have stopped.
Yup, no layoffs at my high-tech work place. And yet a co-worker just casually mentioned to me that he had just short-sold his place and was renting a nicer place for less money. Not because he needed to, but because he could do the math and knew what course of action would be in his best interest.
Once the water-cooler talk changes from what a killing people are making in the market to what a killing they are making by walking away the floodgates will open.
So I am not so sure that unemployment will corilate to price drops in SF.
Umm, are you the real badlydrawnbear?
I don’t know. I have been told that the real real estate killer is in the hands of the banks. There is a hoard of foreclosed properties that they just aren’t putting on the auction block. They are holding their cards. But, if they decide to throw their cards out, we have a really big, bad mess on our hands…