Today you're laughing, pretty baby, tomorrow you could be crying They say every dog has its day The good dogs win and the bad fade away
Peter Green -- It Takes Time
When I first started writing about the housing bust back in 2006 and 2007, I believed that prices would bottom in 2011. When the government embarked on its campaign of market intervention, they managed to engineer a two-year bear rally which has finally run it's course. What they managed to accomplish -- other than shifting much of the losses from lenders to the US taxpayer -- is to delay the bottom by two years. I wish my crystal ball were accurate enough to say exactly when, but now others are starting to accept the idea that we won't see a sustained recovery until 2013.
Demand will grow for urban rental units by the coast and shrink for single-family homes inland, resulting in fewer construction jobs and no boom for some areas hit hard by the housing bust.
By Alana Semuels, Los Angeles Times -- June 15, 2011
UCLA forecasters have seen the future of California's housing market, and it looks like this: more apartments near the coast, fewer McMansions in the desert.
Since housing is still grossly overpriced near the coast, and since people with jobs need a place to sleep, rental demand will pick up. Further, since people can no longer afford the extra square footage of a McMansion, builders are being forced to make houses smaller to achieve lower price points. Those are the real reasons why UCLA's predictions will be correct. The reasons that follow are somewhere between weak and bogus.
That prediction is based on several factors, including expectations that rising fuel prices will encourage people to live closer to jobs along the Southland coast and in the San Francisco Bay Area.
The state's population is also skewing younger, meaning there will be more demand for urban rental units and less demand for suburban cul-de-sacs, according to the quarterly economic forecast released Wednesday by UCLA's Anderson School of Business.
People don't base housing decisions on gas prices. They may choose to buy a car that guzzles less gas while prices are high, but the moment gas prices go back down, demand for SUVs goes right back up. Gas prices may influence how much of a discount is required to get someone to move inland, but even that is less of an issue than how much traffic they will have to deal with and how long the commute time will be.
The idea that a "skewing younger" population will shift demand doesn't seem likely either. Demographic shifts doesn't determine buyer behavior. People will want what they want, and they will substitute as necessary. Academics have written papers predicting housing crashes from the changing housing needs of baby boomers, and those predictions have consistently proven wrong.
"The incremental demand for housing is moving more into multifamily housing," said Jerry Nickelsburg, senior economist with the forecast. "Many of the younger generation have been buffeted by the boom and bust in the housing market, and see value in living closer to work."
Younger workers have been frightened by the housing bust, but home ownership hasn't lost its luster. People will demand what housing they can afford, and as long as housing is over priced, people will demand rentals as a substitute.
That's bad news for the state economy, however, for two reasons. One is that construction of multifamily homes requires less labor than construction of single-family homes. Second, areas such as the Inland Empire and Central Valley that were hit hardest by the housing bust won't get a construction boom to help pull them out of the economic doldrums.
This means "there is an even larger structural unemployment problem in California than we originally thought," Nickelsburg wrote in the forecast. "Not only do we have excess construction, real estate and support skills, but some of those that will be demanded will be in the wrong geography."
UCLA has been wrong in its previous estimates of the impact of the housing bubble. I'm glad they are finally correcting their mistakes. Many of the construction jobs of the bubble will not come back -- it was an unsustainable bubble, and when demand finally reaches an equilibrium, it will be at a lower level of real estate related employment.
California won't start adding a significant number of building permits until 2013, forecasters say, which is one of the reasons the state's unemployment rate will stay above 10% until the middle of that year. Nonfarm employment in the state won't return to pre-recession levels until 2014, and construction employment won't reach those levels until at least 2021.
Construction starts and sales have been near their all-time lows for nearly three years now, and they will continue to drag along the bottom for another two years. As someone who works in the industry, that is not a comforting truth, but it is an accurate assessment of where we are and what we are facing.
"In a typical recovery, you get a bounce-back in housing and hiring of a lot of construction workers," (see chart above) Nickelsburg said in an interview. "We're not seeing that this time, which definitely slows the recovery, and slows economic growth."
Changes in the state's demographics are driving some of these shifts, forecasters say. Household formation has slowed in California as the unemployed have moved in with their family members to save money, leading to less demand for new homes.
In addition, California is one of the youngest states in the nation, according to census data, with a median age of 35.2, compared with 38.0 in New York. Although there are many Gen Xers of home-buying age in the state, many "bore the brunt of sub-prime mortgage and housing bubble crash," Nickelsburg said, and now do not think a home is a safe investment.
The surveys on this issue simply don't back up this contention. Despite the housing bust, people still want to own homes. That's not to say buyers are not wising up to the fact that housing is not a safe investment. People shouldn't perceive housing as a safe investment. Real estate prices do not always go up. The fact that people did believe it was a safe investment contributed to the financial mania that made prices crash.
The market is already responding to this trend, according to UCLA. Building permits for single-family homes have continued to decline while permits for multifamily complexes are starting to regain strength. Permits for multifamily homes are now at 40% of the peak number, comparatively stronger than permits for single-family homes, which are at 20% of their previous peak.
Those are dismal numbers. Real estate related unemployment is also correspondingly high.
These housing issues, coupled with the financial pain experienced by state and local governments, will keep California's unemployment rate at an average of 11.7% this year and 10.9% next year.
The picture is slightly rosier on the national level. Gross domestic product will grow at an annual rate of 3% through 2013, and the unemployment rate will decline slowly, reaching 7.8% by the end of that year. This year, the U.S. unemployment rate will average 8.9%.
There has never been a robust housing recovery in the face of persistent unemployment. It takes people with jobs to buy homes.
The recovery will remain tepid because many jobs are gone for good, said Ed Leamer, director of the UCLA Anderson Forecast. Outsourcing and robots have replaced about 2.5 million manufacturing workers. About 2 million construction jobs are gone permanently because they had been created by artificial demand. Retail technology and Internet shopping, coupled with consumers' spending fatigue, have led to the displacement of 1 million retail jobs.
Those 5.5 million workers are one reason the economy won't grow as robustly as it has in past recoveries, Leamer said.
"We have been vigilant for signs of a real recovery," Leamer wrote. "These have been hard to find."
As reported here back in 2009, our HELOC-based economy will not recover quickly because so much of the demand was artificial. With the housing ATM shut off for the foreseeable future, and with consumer debt at very high levels, we will not be able to borrow our way to prosperity.
Minus 10% annual appreciation
Today's featured property is not for sale. It recently closed for a whopping 41% loss which represents negative 10% appreciation for the four and one half years the owner had the place -- and prices are still falling.
Remember when everyone bought in 2006 because they believed prices would rise 10% a year? Gary Watts said that was "in the bag," not that a realtor would make overly optimistic projections of appreciation....
At the $280,000 sales price, this property is likely at or below rental parity. Of course, it is a condo which should trade at a discount to rental parity, but it is certainly a good sign for the housing market. When more properties reach price levels where the cost of ownership is less than rent, a bottom will form. Until then, local prices will continue to grind lower and affordability will improve.
-$125 .......... Tax Savings (% of Interest and Property Tax) -$356 .......... Equity Hidden in Payment (Amortization) $16 .......... Lost Income to Down Payment (net of taxes) $55 .......... Maintenance and Replacement Reserves ============================================ $1,884 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $2,800 .......... Furnishing and Move In @1% $2,800 .......... Closing Costs @1% $2,702 ............ Interest Points @1% of Loan $9,800 .......... Down Payment ============================================ $18,102 .......... Total Cash Costs $28,800 ............ Emergency Cash Reserves ============================================ $46,902 .......... Total Savings Needed
Property Details for 39 SMOKESTONE #36 Irvine, CA 92614 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 Sq. Ft.: 1117 $251/SF Property Type: Residential, Condominium Style: One Level, Contemporary View: Park/Green Belt, Yes Year Built: 1980 Community: Woodbridge County: Orange MLS#: S602164 Source: SoCalMLS Status: Closed ------------------------------------------------------------------------------ WOW!! THIS IS AN OUTSTANDING VALUE FOR WOODBRIDGE! SPACIOUS THREE BEDROOM TWO BATHROOM LIGHT AND BRIGHT CONDO IN PRESTIGIOUS WOODBRIDGE COMMUNITY CLOSE TO FREEWAYS, UNIVERSITY, AWARD-WINNING SCHOOLS, MAJOR SHOPPING AREAS, AND WITH LAKE AND ASSOCIATION PRIVILEGES! CLOSE TO PARKING AND WELCOMING VIEWS OF THE GREENBELT, THIS CONDO IS AN END UNIT WITH A PRIVATE ENTRY BALCONY PORCH, VISTA OF TREES, A LARGE LIVING ROOM WITH WINDOWS ON TWO WALLS, A SEPARATE DINING ROOM, A SUNNY KITCHEN WITH UPGRADED COUNTERS, A LARGE MASTER SUITE WITH SMALL BALCONY PLUS A DRESSING AREA WITH A WASHER/DRYER CLOSET, AND A SEPARATE BATHROOM WITH SHOWER/TUB.
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