The Housing Bubble And The Employment Effect
Readers want to discuss the housing bubble and the jobs impact. “I wanted to suggest a topic: I want to get into the details of the last SoCal collapse that has (to date) been blamed on the Aerospace industry collapse.”
“Is there a job loss scenario for SoCal that mirrors 1990? There have be oblique references to losses in the mortgage, banking and construction industries that seem to be the most likely candidates, but I also have an example that occured to me through personal experience.”
“I have a relative in Atlanta that has been working in the mortgage industry for the last five years. He owns a condo, but has been also been buying and flipping properties. He knows appraisers who will appraise for ‘whatever he wants,’ he can arrange for them to get the loan, and walk them through the application so that they don’t ‘hit any snags.’ I am a lawyer and advised him this is really a bad idea, filled with conflicts of interest and possible fraud, but he advised me that this is standard operating procedure.”
“This seems to me a very overlooked area of froth (as a shout out to the departing Mr. Greenspan) which might account for some uncertainty in possible housing devaluation.”
Another reader asks, “How about a job loss update? We all know about Ford and GM. How about other recent announcements? Jobs are the glue that holds it all together.”
And another, “I, too, am interested in job loss scenarios for SoCal. A few years ago Big Pharmaceutical got hit pretty hard, though I’m not sure what the real cause was. It might have had something to do with the dot com bust and the Nasdaq decline generally. I know of one chemist who was laid off at that time and only recently got a ‘real’ job again, at Genentech in San Francisco.”
“I’d be curious to know why the downturn in Big Pharm, and could it happen again. After all, they are not profitless tech startups. A big slump in pharm would have a huge effect on the northern bay area and San Diego, if so.” “I’m not sure what the big employment drivers are in the LA area, to be honest. There are a number of smallish tech startups. There is also the movie industry. The major studios are already asking big stars to take pay cuts and they are planning on putting out less product for the next few years.” “In my area, much is made of the fact that The O.C. is filmed in Manhattan Beach. Big deal; one friggin TV show. Yet an unbelievable amount of froth has been generated around it. I am only half-joking when I say that the local economy here consists of selling real estate to each other and teaching each other yoga.”
At 2/05/2006 09:14:10 AM, GetStucco said…
Who remembers:
1) What % of new jobs created in the US private sector since 2000 were directly or indirectly due to the housing bubble?
2) What % of new private sector CA jobs created since 2000 were “…”?
Who knows:
1) What portion of the above will disappear as the air leaves the balloon (and I personally would not assume the percentage will be capped at 100%)?
2) How severe will be the feedback from the contraction in the housing sector labor market into forced sale of all the speculative residential RE “investments” that these high stakes gamblers leveraged themselves into?
At 2/05/2006 09:20:05 AM, jeffolie said…
Real Estate collapses can crash whole countries. For example, Japan, The Asian Tigers:
“The economies of Thailand, Indonesia, South Korea and the Philippines go into free fall.
December 1997: By now millions are without work and decades of social and economic progress have been thrown into reverse. Of 282 firms on the Indonesian stock market only 22 are technically solvent…”
I preditct 30% unemployment.
At 2/05/2006 09:20:39 AM, LA-RealityCheck said…
LA-Economic Drivers?
Of course a substantial amount of what L.A. does is RE related and areospace is not totally dead, but we have a lot of general financial industry jobs too (Hedgies, C.P.A firms, banks, etc.) Furthermore, many people forget that Los Angeles is a large port city and a lot of Pacific Rim goods come through here; read i.e. the consumer goods being purchased by newly discovered housing wealth. Really, most of what we do here is leveraged to the housing\consumer industry.
The one bright spot if housing collapses: LAWSUITS! We have a huge cadre of legal mercenaries that will feast at the “who can we blame for this mess” that always follows bubble busts. Hey, those lawyers have big mortgages too!
At 2/05/2006 09:26:15 AM, mad_tiger said…
The biggest personal loses will occur with those who have tied up all of their human and financial capital in the same basket. In the telecom/technology/.com bubble many who lost their jobs also saw most or all of their savings/401k plan evaporate as their companies’ stock plummeted. Many real estate and mortgage brokers who have been flipping properties also have all of their human and financial capital in the same basket and may suffer the same fate.
At 2/05/2006 09:28:19 AM, goleta said…
“I have a relative in Atlanta that has been working in the mortgage industry for the last five years. He owns a condo, but has been also been buying and flipping properties. He knows appraisers who will appraise for ‘whatever he wants,’ he can arrange for them to get the loan, and walk them through the application so that they don’t ‘hit any snags.’ I am a lawyer and advised him this is really a bad idea, filled with conflicts of interest and possible fraud, but he advised me that this is standard operating procedure.”
Seems that there is nothing there to stop flippers from flipping homes to each other as long as they can find appraisers who appraise for whatever they want and get the mortgages. Just add 20% with each sale and you can easily make $1M flipping 10 homes.
At 2/05/2006 09:49:01 AM, albert_321_321 said…
I think Dan Dorfman had an article a couple of months ago where 50% to 60% of the jobs created were directly related to real estate-construction, loans, real estate, title ins. companies.
Once there is a slowdown-places such as Home Depot, furniture show rooms, Etc. will start to get hurt.
There are other industries such as messenger service companies, paper industries, etc. that all will see a decline in sales.
On other words-a major slowdown.
Than the anti-immigration (illegal) alien laws will start being passed on a daily basis
At 2/05/2006 10:18:08 AM, goleta said…
“I have a relative in Atlanta that has been working in the mortgage industry for the last five years. He owns a condo, but has been also been buying and flipping properties. He knows appraisers who will appraise for ‘whatever he wants,’ he can arrange for them to get the loan, and walk them through the application so that they don’t ‘hit any snags.’ I am a lawyer and advised him this is really a bad idea, filled with conflicts of interest and possible fraud, but he advised me that this is standard operating procedure.”
Seems that there is nothing there to stop flippers from flipping homes to each other as long as they can find appraisers who appraise for whatever they want and get the mortgages. Just add 20% with each sale and you can easily make $1M flipping 10 homes.
At 2/05/2006 10:31:23 AM, george_ie said…
Take a walk through Home Depot, and you can already see the slowdown. HD’s are starting to look like K Mart did in the early 90’s. Run down, unkept, understaffed, etc.
Also, there are markdowns and gift card rebate signs everywhere.
At 2/05/2006 11:03:28 AM, King_Cheese said…
If we look at the housing bubble as an effect of a currency bubble rather than a cause of current economic growth, the picture changes.
If there is a currency bubble, the housing market is only the current stomping ground for excess liquidity, and that excess will find a new recipient once the housing market cools off.
We are swimming in a sea of credit. That same credit caused the careless speculation in the dotcoms. It caused the massive overheating of the asian economies of the early ’90s, and their subsequent overinflation and bust. It caused the Japanese economic boom and bust cycle of the ’80s.
This global credit bubble is the culprit behind our current economic growth, a.k.a. the housing sector. So, in terms of jobs, the question is not when will the housing bubble burst, the question is when will the credit bubble burst.
You see, if excess liquidity persists, it will find a new home. It will move beyond the housing bubble and heat up a new sector of the economy. It heated up Wall Street in the mid ’90s, and when stocks went bust the bubble persisted and found a new target. Therefore, as long as this credit bubble persists it will find more and more places dump its easy money into.
Remember: banks are tightening their “home loans”, but not their all around policies. It is still easy for certain sectors of the economy to get easy credit.
So to answer the question “The Housing Bubble and The Employment Effect,” I believe job creation will move from the current bubble to a new one. There will possibly be another “mild recession” as there was in the early ’00s, until the credit bubble finds a new playground.
At 2/05/2006 11:18:04 AM, TJ & The Bear said…
getstucco:
1) What % of new jobs created in the US private sector since 2000 were directly or indirectly due to the housing bubble?
A recent article stated that 45% of all US jobs created since 2001 were directly related to RE — construction, realtors & mortgage brokers. Of course, that doesn’t include Wall Street MBS packagers, construction material suppliers, new appliance manufacturers & retailers, etc.
Keep in mind that 33% of all jobs created since 2001 have been in government, too.
1) What portion of the above will disappear as the air leaves the balloon (and I personally would not assume the percentage will be capped at 100%)?
125+% IMHO. I fully expect direct RE-related employment to drop significantly below 2000 levels, and those that do hang on will see their incomes cut in half.
Indirect? Who knows, but it’ll be bad, very bad.
At 2/05/2006 11:21:05 AM, SB BubbleBeliever said…
you’re going to Bitch-Slap me for stating the obvious…
but with rampant flipping occuring all up and down the coasts and inland at babyboomer retirement areas- we will obviously see a major effect on all the trades jobs and the trickle down industries of ‘em.
In Santa Barbara, even the lower tier trades like demo crews, landscapers, painters and general labor pool are cruising in their brand new “work rides”… you know- the ones with $2,000 worth of 22″ custom rims, etc. etc?
For the last several years: Word on the street was if you picked up the phone you’d get the job.
As the profits in flipping evaporate, these trades are actually going to have to prove their qualifications.
When these guys were able to get as many hours and jobs as they could stomach- their spending was also “loose”… the fancy rigs, trade tools, even right down to extavagant Starbucks drinks in the morning and fancy lunches.
These are the lower tier workers, but then you also have the materials manufacturing sector-
those hundreds of thousands of workers across the nation that help manufacture drywall, appliances, tile, carpeting, windows, roofing, lumber,plumbing/electrical supplies, etc.
As stated, this is rather obvious, but this real estate fiasco is really going to effect trickle down businesses, no doubt!
said…
mad_tiger said…
Many real estate and mortgage brokers who have been flipping properties also have all of their human and financial capital in the same basket and may suffer the same fate.
2/05/2006 09:26:15 AM
real estate and mortgage brokers who have been flipping properties = “high stakes gamblers,” for exactly the reason you site (the opposite of diversification = putting too many beans in one basket)
2/05/2006 12:53:34 PM
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GetStucco said…
Then the anti-immigration (illegal) alien laws will start being passed on a daily basis
2/05/2006 09:49:01 AM
Then labor costs will go up for a plethora of US industries which are competitive mainly due to low-cost immigrant labor (e.g., CA ag). So right when everything else is slowing down, protectionist pressures may force politicians to drive up production costs, which will worsen the situation. And lots of recent residential RE demand in CA has come from the no-doc recent immigrant crowd, as well.
2/05/2006 12:57:13 PM
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jeffolie said…
King_Cheese
Do not understate the devastation to Japan and the Asian Tigers.
indiana_spectator
I am retired. I did analysis for a major Electric Utility for 25 years.
2/05/2006 12:58:35 PM
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nhz said…
flat said…
in UK which started down in june 04 the effect has been zip so far, and almost all morts are arms there. FTSE is up more than S&P
same story in some other EU countries. However, when the current parabolic trend in foreclosures and bankruptcies continues for another year or so, I don’t see how the economy can stay in shape (it already is in bad shape in many EU countries).
2/05/2006 12:58:54 PM
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Robert Coté said…
Regards HomeDeopt and
Take a walk through Home Depot, and you can already see the slowdown. HD’s are starting to look like K Mart did in the early 90’s. Run down, unkept, understaffed, etc.
This started the week after Thanksgiving. Home Depot is try to shift its’ balance sheet away from a growth model. It’s really pathetic, they don’t carry hardware as such anymore as much as they are a lifestyle center. They have stocked their shelves with the really high profit margin items and only keep enough hedge trimmers and hacksaws to keep up appearances. Even those are way overpriced. Luckily I live in Camarillo, California. Home to Harbor Freight and Tools. When the Chicomms start to tighten the screws I’ll see it first with the shelf prices there.
2/05/2006 01:00:57 PM
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GetStucco said…
Just add 20% with each sale and you can easily make $1M flipping 10 homes.
2/05/2006 10:18:08 AM
Unfortunately, money trees invariably lead a short brutish, life — a consequence of too many people trying to pick their fruit. The money trees which remain standing in the orchard are about to be hacked down by Ben Bernanke’s big axe.
2/05/2006 01:02:15 PM
Ben in LA said
I am an Architect with a large Southern California based firm
The Los Angeles Unified School District has the most aggressive construction and modernization program being undertaken throughout the nation, thanks to the bonds that voters have passed over the last several years. A good number of these projects are under construction, some actually opened their doors this fall. The South Regional District (South Central) is just releasing 20 more schools to begin the design process. That combined with LACCD (Los Angeles Community College District) Bond projects for their eight community colleges, along with all of the other districts that have recently passed bond project is an incredible amount of construction over the next 5 years in the Los Angeles are.
We are seeing a huge increase in projects for Senior Housing. Baby boomers are turning sixty, and we are seeing a huge demand for Independent, assisted, and skilled nursing housing. Baby boomers will not want the same type of senior housing that their parents accepted.
Right now the Los Angeles area is suffering from a severe shortage of subcontractors to bid on these projects, combined with 40% spikes in construction cost. A slowdown in housing construction could only be a good thing for the region.
I don’t know this situation will impact other professionals that are involved in the housing market such as real estate agents and loan brokers, but a slow down in residential construction will not impact the regions construction industry.
From what I hear in LA, the entertainment industry is getting hit with outsourcing as well. Hollywood is no longer the only place to make movies and TV shows — look at how many movies are filmed in Canada and overseas.
That being said, I know very few people whose lifestyles are not tied to the housing bubble (directly or indirectly). So many have become RE agents and lenders. Many more have used thier home equity as the third income-earner in the family. They live off their homes, and even use the equity to make their mortgage payments.
As others have said, this will be very, very ugly IF the Fed/government doesn’t interfere.
jeffolie,
Indeed Japan, Southeast Asia, Argentina, Mexico, et al were hit hard. The difference between them and the US economy is that America is the economic engine. In other words, our trade deficits are causing their boom-bust cycles.
From a credit perspective there is little difference where the loans are made. As long as the US has a trade deficit with a nation, they will go through these boom-bust cycles. China, however, is trying to have their cake and eat it too by not putting any of their trade surplus with the US into their own currency. The price they pay is artificially supressed wages.
As long as the US has a trade deficit and the dollar retains the illusion of strength, the money earned from our trade deficits will be put back into the US. That is the currency bubble.
The house of cards will fall when the dollar becomes so unstable that interest rates must rise to meet the risk of lending in dollars. Then the credit bubble will pop and so will the artificial economic growth. Other nations will no longer finance our poor borrowing habits. Thus an economy built on debt will dry up and the true value of our toys will show.
America actually has experienced this scenario twice before. The first was the roaring ’20s followed by the the great depression of the ’30s. That was a cycle created when we came off the gold standard during WWI.
The second is less known. It was the receeding economy of the ’70s immediately following the elimination of the Bretton-Woods standard. The reason the ’70s are not as well known is that America was the largest creditor nation in the world. We raised interest rates at will because we benefited. However, today we are the largest debtor nation (does the Feds interest rate policy make more sense now?) and we shoot ourselves in the foot if we raise rates.
It is this recent debtor status that has forced the Fed to print too many dollars. Thus the currency bubble.
America will thrive in one sector or another as long as there is the desire and means to create excess liquidity. When either of those fail, we may revisit some milder version of the great depression. I say milder because we will follow the Japanese example of borrowing money to bail out our economy - zero interest rate loans and no borrowers (a topic for another day).
I honestly do not see soup kitchens and people living in their cars. What I do see is falling wages and a thriving trade surplus with Europe. Europe should be the next economic engine, until they make our same mistake - which they will.
Great topic. I have lived in Socal for over 24 years, specifically the South Bay. As long as international trade w/ Asia booms, this area will be OK. Not to be racist, but the majority of the incoming crowd to this area tends to be Asian (Korean, Chinese, and some Japanese). I don’t have any problems w/ that, but I am amazed at how these relative newcomers to the US are able to plunk down big bucks for homes. A Chinese friend of mine said that a lot of sucessful people in China and Taiwan invest their “spare” money in Southern California. In the city I live in, it appears that 80%+ of new home buyers are Asians. Bottom line, if international trade takes a dump, so will So Cal real estate.