Wednesday, November 18, 2009

It's Jobs, Jobs, Jobs and No Jobs!

It's quite obvious now, it's all about jobs now. The housing recession began a couple years ago starting with unsustainable prices. Then, credit froze due as the "slice and dice" of residential mortgages into securites began souring. Not much has changed since then, other than taxpayers bailing out bad banking behavior, and many failed government attempts to revive the housing market. It is eerily reminiscent of the 1930s, when the country was mired in the Great Depression.

What has changed is, now we are in phase II of the Great Recession, job loss. Typically, unemployment is what triggers recessions. Without a job, you can't afford ANY housing payment, no matter what tricks the government tries. With the state and now local area bleeding jobs, housing prices must and will fall further. It's common sense, that if your spending 50% or or more on housing, after food, gas, insurance etc., there's not much left for discretionary spending. Without discretionary spending, local businesses fail, more people are laid off and the recession begins feeding on itself. Furthermore, the good paying jobs being eliminated aren't coming back, and the jobs that are, don't support current housing prices.

The bottom line is, there aren't enough sufficient household incomes to support prices on all the homes for sale. This will cause further erosion of housing prices until the area adjusts to the new household incomes. In addition, rents are falling as the job market changes, putting additional pressure on prices. I'm afraid we won't see 2007 bubble housing prices or credit for a long time. Living within your means is now the new reality, what a concept!

21 comments:

Anonymous said...

True, Latesummer. It started with the bubble, then with the financial collapse. After that it hit the real economy in the marginal areas and now it's becoming full-blown. Is it just me or does everybody else see the signs of adversity all over the Westside? Before it was the foreclosures in Riverside, now it's the houses for rent staying vacant at reduced prices, the sales in fancy grocery stores, the price cuts at Macy's, etc.
I am in healthcare, a field unrelated to finance and real estate, but my cash flow is suffering just the same. Insurance companies take longer and longer to pay (up to one year), patients cannot afford deductibles, other lose their insurance and can't get health care. And that is just a minor side show compared to what other people are going through. This is beginnnig to look awful for everybody, regardless of their involvement in the bubble. More pain to come.

Anonymous said...

Is it just me or does everybody else see the signs of adversity all over the Westside?

Its just you...

speedingpullet said...

No , its not just you Anon 3.09pm (despite the glib reply by anon 3.25pm) - even the Westside is vulnerable.

I'm associated with the video game industry, and heard on friday that one of the biggest developers in L.A lost 1,500 jobs - a large amount of which are in the Westside area.

The Westside may be more cushioned from the economic downturn, but its not totally immune.

Anonymous said...

Over the past year and a half, 5 restaurants in a mile radius in my Westside area closed down.

Most of these locales had been in the area for years but they all went out of business within a very short time span, a sign of a sudden downshift in consumer spending....or so it appeared.

Now all of these sites are having work done on them and display signs declaring that a new, more upscale restaurant will be opening soon.


So someone is investing, spending, and redeveloping. Isn't that a sign of potential property appreciation??

Anonymous said...

Anon 8:34, probably the new restaurants are going to open with a different cost structure, menu, etc. I think in that type of business it is much easier to close and open a new one (even with the same owner and core employees) than to restructure what you already have.

Anonymous said...

Anon 8:34. No, new restaurants opening is not a sign of property appreciation. Maybe they were re-leased at a lower price than before.

Anonymous said...

Wait a minute. When a commercial tennant leaves a space, there are two things that can happen. The space can sit empty for years and years or a new tennant can come in and take it over

The fact that these places are not sitting empty is a bullish sign. Someone with money is investing in rennovations and decoration, Someone with money is putting money at risk.

I would say that if it is a smart business man who made money over many years that is putting money at risk to open restaurants in the space that is a good sign

I would say that if it is just a government program providing the money then that is bad. For example, the small business administration routinely loans all the money for businesses that make no sense that quickly go bk - leaving the taxpayer to pick up the tab.

So I am open to the opinion of others but depending on who is providing the money, big investment in new restaurants could be bullish

blahblahblah said...

Generally, businesses dont just close for the sake of it. They usually fail. High turnover is directly correlated to failures.

Guess what you want about rerent rates. (although all data shows commercial rental rates ARE dropping) When you see high turnover, its from high failures. Not an opinion, its a fact that can easily be Googled and validated. Anon 8;34, a little research would have shown how dead-wrong you are.

Anonymous said...

The faster the government allows house prices to fall back to reality, the sooner the economic recovery can begin.

Anonymous said...

The stupidity of these comments amazes me.

The fact that the restaurants closed is generally seen as BEARISH

The fact that new, higher end ones reappeared generally seen as BULLISH

Now you can argue all you want about how rents fell, or these new guys will fail too, but the fact of the matter is, this is how a market clears.

The entire transaction is not just bearish, or just bullish - its all part of the "creative destruction" you see during a recession.

Anonymous said...

Sweet - I will be able to move from South Santa Monica to North!

Robert said...

Perhaps there were too many restaurants. And cupcake stores. and retail stores in general. and car companies.
Just because you open a business, or become a doctor or lawyer or an astronomer does not mean one is entitled to be a financial success. Just because you buy a home in Beverly Hills or Palm Beach does not mean you are entitled to sell it at a higher price.
It's time we realize that we Americans are entitled to nothing....except public school education, a police and fire dept, the right to vote and pay taxes.
We are not even entitled to medical care which is a shonda.

Anonymous said...

Interestingly, we are not seeing much of the pain on the Westside. A drop in activity and a few empty storefronts. Most of us here on the Westside have a few $$ in the bank and can weather a storm for a while. Most of us still have income, even if down a bit. I am curious to see how long this can last in the face of the downturn. But so far, the evidence is: Quite a while!

When people can't keep their houses, the price will fall. Any predictions, especially in the over $2mm market??

Anonymous said...

Anonymous 3:28, if you are in the over 2M market you can already shop at a significant discount if the price and the house are right for you. That part of the market has been pummeled already because it is difficult to get jumbo loans. The only stuff that's flying off the shelves is around 1M. Most westsiders can afford a sizeable downpayment and get the subsidized loan. Upwards of that is another matter. The flip side is probably that the sellers in that range can also hold out much longer. Choose well.

Anonymous said...

Robert, you got to be kidding? Americans have a right to pay taxes? Most of the taxes are unappropriated therefore unconstitutional. I hear It took the crisis of the World War II to even establish some of these taxes. And then someone forgot to repeal these taxes. So now you are happy if you get a tax break from the government. Crazy.

Anonymous said...

I know two young couples - both are shopping for houses in Sunset Park

One of these couples is looking to borrow 6 times their combined income from FHA and the other is looking to borrow 11 times

Can anyone tell me what the upward limit that the FHA will lend is - what is the maximum multiple of income

Latesummer2009 said...

FHA is the next bailout waiting to happen. Govt refuses to learn it's lesson. Who will be left to lend money? FHA has become the new subprime. How pathetic..

This ends bad I'm afraid. Fed is backed into a corner.

JBR said...

"looking to borrow 6 times their combined income from FHA and the other is looking to borrow 11 times"

Well, beside the fact that they're insane, it's really more of a Debt to Income test the current DTI limits are FNMA 45 and FHA 43. Until now, it was pretty easy to get approved even if you exceeded those limits. From what I hear, that will be changing real soon.

Anonymous said...

The max FHA loan is 729K. That's why houses priced at under 900K are selling and most houses above 1million are sitting on the market.

Anonymous said...

I don't think the Westside of LA is immune. Overall, LA cost of living is WAY to high for wages. My SO and I moved away after both lost our jobs. We are getting back on our feet but moving back to LA seems crazy now - rent costs for anything decent are ridiculous - $1400 for a 1 bedroom in a shitty neighborhood - gotta be kidding me! We know many other couples who have done the same thing - moved out. Jobs in LA are non-existent and when they do exist, do not pay what they pay in other expensive cities. Also, nuisance fees with higher health and car insurance rates of LA create a hole in the pocket phenomena. Without decent paying work, people leave and real estate drops. Simple as that.

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