By Dr. Alfred J. Gobar
Alfred Gobar Associates
Historically, there has been a close correlation between reported nonagricultural wage and salary employment and number of occupied dwelling units. This relationship has been tested for the United States as a whole, showing a long-term (50 years) correlation coefficient (R2) of about 0.985. Individual analyses of housing markets in 140 U.S. Metropolitan Areas confirm this correlation.
Currently, the Federal Reserve Board seems to believe that a strong housing market will cause growth in employment, whereas most of the research Alfred Gobar Associates has done over the past decades suggests employment is the independent variable, and housing absorption is a dependent variable.
In any case, as shown in Exhibit A, nonagricultural wage and salary employment in Southern California as a whole has been increasing over the past twelve months. This measure of economic growth for the Southern California economy as a whole (Ventura, Los Angeles, San Bernardino, Riverside, Orange, and San Diego Counties) is illustrated on a county-by-county basis in graphic form in Exhibit A. In percentage terms, employment growth in the Inland Empire has been substantially stronger than in other parts of Southern California, suggesting that the local employment base accounts for an increasing share of the total housing market in the Inland Empire, which for several decades prior to 1990 was dependent on commuters to jobs in Orange, San Diego, and Los Angeles Counties.
Growth in nonagricultural wage and salary employment in the Southern California area between 2012 and 2013 amounted to approximately 150,000 jobs. This is fairly typical of “normal” economic times in the Southern California region and suggests increase in housing demand at a rate of about 120,000 units a year, allowing for second homes, some increase in vacant units, etc.
Strong employment growth is evident for professional and administrative jobs, in the education and health fields, and in leisure and hospitality. State and local employment actually decreased over the most recent twelve months.
The pattern of change in nonagricultural wage and salary employment in Southern California, in the current recession as, compared with similar trends for the recession that began in June of 1990is illustrated graphically in Exhibit B. Extrapolation of these trends suggest that employment levels in Southern California will be back to the pre-recession level (of 2007) in late 2016 or early 2017; i.e., we still have a little ways to go to get back to where we started. Meanwhile, we are building a few new units.
Anecdotal information in the media suggest an exploding housing market. To some degree, this is an illusion. The large proportion of cash buyers implies that professional investors account for a large share of the market. In essence, when a speculator buys a foreclosed home for cash, rehabilitates it, and then sells it to a user, the entire transaction is equivalent to only one net sale of a housing unit to an ultimate user; i.e., the formation of a new household to buy or rent the incremental dwelling unit generates two sales—one to the speculator and the final sale to the user. In most normal circumstances, the formation of a new housing consumer generates one sale. The current market also is, in part, an illusion fueled by incredibly low mortgage interest rates.
Building permit activity in the High Desert is illustrated in Exhibit C. During the first three months of 2013, a total of 81 new units were authorized by permit, all of which were single-family homes. The largest number of new units authorized was in Victorville, followed by Apple Valley and the unincorporated area.
A linear extrapolation of 81 units per quarter suggests an annual rate of new development of 324 units a year, or 4.0 percent of the level of building permit activity that was achieved in 2005 (8,295new units were authorized by permit in the High Desert in 2005). The current level of development represents about 8.0 percent of annual average building permit activity in this area from 2000 to 2010.
The supply-side of the demand and supply equation is not accelerating at a rate likely to result in shock in the near term.
Permit valuation data for 2012 and 2013 are not available. Information for 2011, however, shows a high average permit value per unit for new single-family units, suggesting that the limited amount of new housing being developed in the High Desert includes a larger-than-average proportion of custom homes, which would typically carry a higher permit value per unit.
Exhibit D summarizes nonresidential building permit activity on the HighDesert. There is little recent activity except for some new retail construction in Barstow and industrial development in the unincorporated High Desert. The total for the first quarter of 2013 is at an annualized rate of about $100 million worth of permit activity, which is less than the aggregate for 2012 or any other prior year shown in Exhibit D.
Exhibit E expresses this information as a percent of San Bernardino County totals. The High Desert is not constituting a large proportion of the county’s industrial and retail development. This is to be expected since these uses tend to be driven by either an urban environment or an increase in the consumer population.
Another interesting manifestation of the recession is that the composition of employment in Southern California is changing. Historically, nonagricultural wage and salary employment data are collected on the basis of a survey of employers. This data do not provide a basis for estimating unemployment. Another measure of total employment as well as of unemployment levels is based on a household survey in which respondents report the number of people in the household who are employed and also the number of people in the household who would like to be employed, but who are not (unemployed) and further information regarding part-time work, type of employment versus the employed person’s training and education, etc. Historically, the level of employmentthat could be deduced from the Household Survey has exceeded the employment level estimated on the basis of the Employer Surveys, with the nonagricultural wage and salary employment estimate being about 85.0 to 87.0 percent of the estimate derived from the Household Surveys. This suggests that 13.0 to 15.0 percent of employed people worked in jobs as independent contractors, self-employed entrepreneurs, etc. The most recent data for 2013 indicate that the nonagricultural wage and salary employment sector as reported by employers is a smaller percentage of total employment than typical and that, therefore, independent contractors, self-employed people, etc., are an above-average proportion of the total; i.e., a larger-than-usual “informal” job base.
This ambiguous employment is likely to represent an increasing share of total employment as Obamacare goes into full force with restrictions on employers in terms of providing medical insurance relative to full-time versus part-time total employment level, etc.
In the next few years we are likely to see a larger proportion of total employment who will be people whose employment is not reported on the basis of the Establishment Survey and, therefore, the relationship between change in nonagricultural wage and salary employment and number of occupied units will imply that it takes fewer jobs to support the absorption of a new dwelling unit. That phenomenon may already be appearing to some degreebecause of the trend lines illustrated in Exhibit F.
The data discussed above implies that full economic recovery is likely to be two to three years in the future. A larger proportion of the housing market in the Inland Empire will be supported by locally-employed people than has been true in the past. Land absorption (the economic variable of interest to many of the readers of this newsletter) at a rate of 120 acres per 1,000 new residents of the Inland Empire is likely to be fairly modest for the next two to three years. Sometime during the reasonably near future, real inflating-adjusted interest will have to come above zero percent on an after-tax basis, which raises the potential for a cosmic economic problem at the national and international level of how we cope with the huge amount of debt and high interest rates in an environment where we need economic growth. The economist whose ideas account for a lot of our current problems (John Maynard Keynes) may have had this situation in mind when he responded to questions about the long-term risks of his policy implications that, “…in the long run, we will all be dead.” Could it be that the long run is finally catching up with us? At the age of 81, my odds of avoiding the long run are a lot better than those of the typical reader.