California 2009 Economic and Housing Forecast: Examining 5 Areas Showing California will have a Tougher Economic Year than 2008.

I won’t sugarcoat it for you.  2009 will be a much more difficult year for California than 2008.  I am astonished that many pundits are now claiming how 2009 will be an up year for the markets even though the Dow Jones Industrial Average just faced a pounding unseen since 1931, during the Great Depression.  They’ll point to examples like 1907 when the market fell 37 percent only to rebound by 46 percent in 1908.  This is absurd since 1907 was much more isolated in terms of global reach and J.P. Morgan stepped in and put up some of his own money to instill confidence.  You tell me who is putting up their own money.  Today we have a bunch of beggars mostly Wall Street and financial firms going to Washington for a piece of the bailout money parade.

This time is significantly different.  I have given you 10 reasons why nationally this recession will be the worst since World War II.  Those 10 reasons still stand as we enter the new year.  Yet California will face the pain on a more pronounced level because it has put its lot with real estate and finance.  The heart of the housing bubble darkness started here in sunny California.  Remember epic toxic mortgage dealers like New Century Financial out in Irvine California?  Or who could forget the ultimate toxic mortgage factory Countrywide Financial which has miraculously disappeared into the belly of the Bank of America beast.  Or what about the fact that the median home price in California flirted with $600,000 for a month in 2007?  These examples have all disappeared.  New Century Financial is gone and so is Countrywide.  That $600,000 median price is now $285,680 if we look at the California Association of Realtors data.

Many people including those once skeptical now think that we have reached bottom because things became so sour in 2008.  They will be shocked this year.  Why?  Just because things have fallen so quickly is not a justification that things will now go up.  This seems to be the argument most mainstream pundits who believe 2009 will be a better year use.  They use an iteration of the argument that goes something like, “2008 was such a brutal year, that it is now time to go bottom fishing.”  Total non-sense.  If you look at the data what we will see is continued weakness in the markets.  More direct to California, we still have many issues to confront.

What I will discuss today is the 2009 forecast for California in terms of the economy and housing.  You can dig through the hundreds of articles here if you want to see how accurate some of the past analysis has been.  The first problem we still have is much of our employment is still closely tied to real estate.  That has not fully changed.  Consumer psychology is much more fragile now.  That is, many people now believe that no, real estate does not go up forever.  This is probably irretrievably damaged for a generation keeping another real estate bubble from forming anytime soon.  Housing prices are still tanking and believe it or not, many metro areas in California are still wildly overpriced.  Another reason is the budget is in shambles.  Do you think it is good that we are on the verge of bankruptcy in the matter of 2 months?  Plus, the toxic pay option ARM tsunami will be hitting with full force this year.

Reason #1 – Employment

As you can imagine, I look at tons of data.  The only way you can determine future movements in this market is glance at multiple data points, reference historical economic moments, and try to forecast where things will move.  You need to be cognizant of history, understand economics, and know how mass psychology affects consumer behavior.  With that, let us first look at the California employment situation:

California Unemployment Rate

First, the unemployment rate in January of 2008 for California was 5.9 percent.  The latest data we have is for November of 2008 and the current unemployment rate is at 8.4 percent.  A 2.5 percent increase in less than a year is amazing.  Without a doubt, the California unemployment rate will be well above 10 percent by the end of the year.  Why?  Well take a look at some of the latest layoff announcements being made:

California layoff announcement

What you should immediately notice is this is well beyond a real estate and finance problem.  Sure, the bulk of layoffs came from industries closely tied to these fields but the above list now tells you this is spreading to pretty much every industry you can imagine.  Looking at the raw numbers of unemployed persons according to the BLS, it looks like California added 478,000 people in 2008 alone.  Nationwide 1.911 million people were added to the unemployment statistics.  What this means is California was 25 percent of all unemployment net-additions.

What you then need to do is look at which industries employ the most Californians:

California employment sectors

The layoff announcements should tell you that practically every area is feeling the crisis.  The above chart should give you a snapshot of how the employment picture pans out.  I’ve highlighted areas that will be directly impacted by this crisis. This does not mean other areas will not but these areas will feel the pain more directly.  First, with sales and food related fields these are lower paying industries.  Many of these workers will have a tough time finding other work should they be laid off.  California’s unemployment insurance is reaching a breaking point.  Construction will face pain as well.  Who is building any projects right now on a mass scale?

Reasons #2 – DRE Licensees and Consumer Psychology

California Dre licensees

*Click for sharper image

For the large part of the 1990s, there were approximately 300,000 real estate licensees in the state active at anytime.  We are currently at 535,000+ active licensees.  What does this mean?  People are still delusional regarding real estate.  I should point out a caveat that many DRE licenses last a few years so you may be seeing people still active on the rolls yet not renewing anytime soon.  Forecasting is looking at the future and we can already see that the real estate psychology is broken:

DRE Exams california

The above is stunning.  In September of 2007 14,918 salesperson exams were administered.  September of 2008 only 1,590 exams were given!  In October of 2008 only 1,480 were administered.  Game over.

What this tells us is the allure of real estate is being broken.  The once glamorous lifestyle portrayed on housing porn shows is now quickly evaporating.  Keep in mind this was another revenue (although tiny) stream of income into the state which will now be gone.  How many people will stop renewing their licenses?

Reason #3 – Case-Shiller Housing Prices

Case Shiller Index California futures

I want to spend sometime on this chart.  I have constructed the above chart using the Case Shiller Index data for 3 largely followed metro areas in California.  The data up until October 2008 is from the actual data set.  I’ve also included the futures data which is traded on the CME.  When I tell you that California will not hit a housing bottom until 2011 I am not the only one who believes this.  These contracts are backed by money.  If you believe otherwise go ahead and make a bet with your own hard earned money.  Let us see how many pundits put up some serious cash here.

The first thing that should come to your attention is all 3 major areas have further to fall.  Los Angeles and San Diego have the biggest drops according to the futures data.  Yet what should jump out at you as well is how the market will essentially stagnant well into 2013.  The contracts for 2012 and 2013 are little traded but you already have people betting for a stagnant market for another 4 years.  I tend to agree with them.

There is very little evidence to show us that somehow prices will be rebounding anytime soon.  Short of skyrocketing wages and solid employment, why are we to believe the market will do well in 2009?

Reason #4 – California Budget

California budget

How can anyone listen to politicians tell us we are weeks away from a statewide bankruptcy and then in the same voice, say things will be better in the state for 2009?  Look at the above chart.  I have used this chart numerous times because it highlights the magnitude of the problem.

The two largest sources of revenue for the state are personal income tax and sales tax.  With unemployment rising (see above) that means less employment taxes.  With sales falling and property prices tanking, this is another revenue which will be shattered.  Also, California is home to many millionaires and billionaires, the most of any state in the country.  Many of these people have money in the stock market.  When they go to do their taxes, guess what is going to happen.  We just had the worst stock market since the Great Depression.  You can rest assured that many of these people are going to claim losses, meaning they will pay zero to the state because of incredible losses.

There is only way to fix this problem.  Raise taxes or cut jobs.  Both are bad yet that is what is left.  Cutting jobs only adds to the unemployment lines and raising taxes in a bad economy doesn’t help.  Our current group of politicians has no backbone.  Do some of both and get on with it.  Yet be strategic about it.  Don’t be idiotic like our federal government that is bailing out crony capitalist and is throwing trillions of dollars into an abyss.

Unfortunately, we are broke both as a state and at a federal level.  Where will the money come from?  The California budget is well over $100 billion so this isn’t going to be solved by telling people to stop using staplers.

Reason #5 – Pay Option ARMs

The final nail in the coffin is the number of pay option ARMs that will recast in the state in 2009.  These incredibly toxic loans are going to recast at the worst possible time.  I’ve seen a few argue that lower rates will help yet this is a misnomer that will do nothing for the pay option ARM of California.  And for the purposes of pay option ARMs, over 50 percent of the nominal value of these mortgages outstanding rest here in California.

Why is this problematic?  First, as we pointed out above the median home price in California has fallen roughly 50 percent from its peak.  Many of the option ARMs have little equity from home buyers.  That is, little skin was put into the game.  Now that prices have tanked, many borrowers are running the numbers and are gearing up for a moonwalk away from their mortgage in 2009.

You can ignore the drop in foreclosures towards the end of the year.  This was because of SB 1137 and the Fannie Mae and Freddie Mac moratorium.  Guess what?  Holidays are now over and now back to reality.  These pathetic measures were the equivalent of an ostrich sticking its head into the sand.

In addition, you cannot refinance an underwater mortgage!  The vast majority of these California loans are so underwater, they are swimming in Jacque Cousteau territory.  These loans never served a purpose and we can only hope that with new federal regulations, we have an outright ban on them.

Those are 5 reasons why California will have a challenging 2009.  There are many other reasons as well but let us start out with only 5 since the year is young.  Buckle up because it is going to be bumpy ride folks.

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31 Responses to “California 2009 Economic and Housing Forecast: Examining 5 Areas Showing California will have a Tougher Economic Year than 2008.”

  • Another great post from the doctor. Thanks!

    Moonwalk away from your mortgage (if it’s non-recourse) and put the extra monthly proceeds into physical gold coins and bars. Opt out of the funny money system and watch your wealth increase. Gold is money and bureaucrats banning it from its historical role won’t stop the impending gold rush from happening anyway. Governments will make all the wrong moves in 2009 and make all the current bear markets, including real estate, worse.

    As a member of the sheeple class, quiety holding physical gold outside the “system” is the best way to protect your savings. Think of it as a peaceful protest against our debt-based paper promises society. Eight years in a row of positive gains for gold and 2009 will be no different. (http://goldversuspaper.blogspot.com/2009/01/gold-end-of-year-assessment.html)

    All those who think gold will do poorly in a deflationary environment are ignorant of history. Gold is real money and cash is king during a deflation.

  • Like the article. I disagree about raising taxes. California needs to raise some of the taxes that the Governator was talking about. Yes it sucks during tough times, but in the face of bankruptcy what are the other options.

    Also California at the same time needs to give certain tax breaks to businesses so certain jobs will stay here vs go to other cheaper states or off US shore locations.

  • As always, a reasoned and very well written and documented commentary.There is another item, which you may have touched on before- the CALPERS meltdown. During the Gray Davis years, when Wall Street was returning 20%, Davis doubled the retirement benefits for public employees. (A secretary in Sacto. who works 20 years, will now retire a millionaire.) Calpars has lost tens of billions of dollars in real estate and stock investments. They are going to require local gov’ts. to make up the difference, starting in about 18 months.This will drain millions of dollars from local cities, resulting in service cuts, parcel taxes, and layoffs. Further info. can be found at:
    http://www.pensionsunami.com

  • Some other issues for California are:

    6) Banking–once very profitable for California, now in chaos. BOA’s in NC now, but Wells will be trying to pass Wachovia feces in 2009. Both will need more bailouts and both will not be paying taxes in 2009.
    7) Defense–continues to contract. Mirimar? Onizuka ? Coronado? Seal Beach? (some may already be gone, some may remain, but the huge defense budget cannot be sustained in this economy)
    8) PC’s–everybody got one, who wants to upgrade? MAC’s are for being pretentious and to show you have money to waste. Gizmo’s and gadgets falling out of favor as people are financially pressured. HDTV? To watch what? Hardware is getting better but programming is not.
    8.5) Movie industry, music industry? You can make movies cheaper everywhere and they are. Music industry is dying, and you can make digital quality anywhere. Why were it’s expensive?
    9) Agriculture–another bubble burst. Drought destroying crops, prices destroying profits and tax base.
    10) Defense–huge source of revenue for CA. Blank checks for missles are probably not in favor with the next administration.
    11) Trade–global slowdown will hurt CA port business.
    12) Unemployment rate is directly proportional to crime rate. Less money to control crime, prisons, courts? Not in a recession. Just the white-collar crime in CA would keep the prisons full, if deserving housing criminals actually went to jail. Whose going to feed the 200,000 members of the CA bar?

  • As a reader whose age is in the 80s, I have had an aversion to RE investments all my life simply because my family lost big time in the 1930s (when I was coming of age). Like you say, “(real estate valuations are) probably irretrievably damaged for a generation”.

  • Soylent Green Is People

    The increase in licenses is likely due to banks, etc, requiring licensed mortgage loan officers, not people getting into the business to sell.

  • Great post to begin 2009, DrHB. Hopefully, people will look at the facts this year and try therapy for any cognitive dissonance. I believe the big difference this year will be in consumer psychology. The facts have been horrible for some time now, but very few now doubt, the shape we are in. California is often times the leader in economic and social trends. This time will be no different, except it will be to the downside. All the “talk” among friends will become a self-fulfilling prophecy and the numbers will only reinforce reality.

    Serious economic meltdowns are coming to all neighborhoods in California, during 2009.

    http://www.westsideremeltdown.blogspot.com

  • you have to meney high paid people in gov. services in ca. to meney fools liveing on mountains so they can be burnt out by fires,paid for by taxes. when are people going to wake up-(when its to late !!)

  • Too many people can’t spell.

    Seriously, “to meney”? Oy!

  • Great articles as always. I am so glad I have found this blog, but does anyone know or i should say think how far housing prices will far from there peak in the san fernando valley. 60% by 2011 or way less. 50% by the end of 2009??

  • perks in chino hills

    L lewis wrote— “Like the article. I disagree about raising taxes. California needs to raise some of the taxes that the Governator was talking about. Yes it sucks during tough times, but in the face of bankruptcy what are the other options?”

    What other options? Uh how about cutting spending? California’s budget has grown 40% in the last 5 years. Simply cut spending back to our levels in 2003, and we have a balanced budget. Seems pretty simple to me. Raising taxes with rising unemployment is a stupid thing to do, especially when California is already the HIGHEST taxed state in the country!

    btw- Dr. HB I’m a long time lurker. Love the site and your posts, keep up the good work.

  • They could keep the California budget under control if they didn’t spend billions of dollars on services for illegal immigrants in California every year. While there are tons of homeless Californians from foreclosed homes living in tent cities.

  • Here’s what I don’t get. Everyday I drive for miles – all around the West San Fernando valley, and I see no evidence of anything. No particular abundance of For Sale signs, no empty parking lots, or empty buildings – but I see lots and lots of traffic, with cheap gasoline.
    I’m looking for signs of some kind of crises. I keep hearing and reading about this near-depresson, but I have yet to witness it. So what ever is happening, must be bubbling under the surface at the moment, and hasn’t shown itself here – YET. Although two people I know have been laid off. To them, it’s a depression.
    2009 should be a strange year.

  • Dr HB you seem to be out of the loop. George Chamberlain, the CNBC crew, and several prominent economists predict happy days ahead, likely be the 3rd quarter.
    Everyone is saying buy stocks and houses now, these prices will never be seen again in our lifetime.

    Well, the only thing I plan on buying over the next 5 years is a new set of Xwing TI skiis on ebay and when my 4×4 breaksdown a new truck. Nissan or Toyota of course, can’t trust the new government run car manufacturers. Just ask the Russians. They had to buy one car to drive and the other for parts.

    Do not worry about CA the Feds will bail them out shortly, budget deficit gone with the stroke of a key.

    Dosvidana comrades

  • Dr. You say there are only two solutions to California’s financial woes, tax increases or job cuts (cut expenses).

    What about the Fed printing up some electronic dollars and injecting them into California’s coffers. This would instantly make them solvent and protect govt jobs.

    I know it sounds conspiratorial. But frankly the Fed has promised to do “whatever it takes” to prevent deflation. They have already said they plan on “qantitative easing”, creating money out of thin air…and they want economic stimulous in the form of spending billions to create jobs, consisting mostly of funding current state infrastructure initiatives. If California faces a budget crisis, cant borrow or print more, and will either tax a weak economy or lay off workers, wouldn’t it make sense for the Fed to bail out California?

    I mean…would it be so hard to simply create 100 billion electronic dollars out of thin air and transfer them into California’s coffers?

  • Don’t worry about CA and their budget, the Feds will bailout our state with the stroke of a key. Drudge’s new headline hints the GOV with send the states ONE
    TRILLION dollars to make everything feel better. Trillion here trillion there whats the difference.

    Dosvidanya tavareesh

  • The WSJ most emailed article predicts the end of the USA.

    http://online.wsj.com/article/SB123051100709638419.html

    “California will form the nucleus of what he calls “The Californian Republic,” and will be part of China or under Chinese influence. Texas will be the heart of “The Texas Republic,” a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an “Atlantic America” that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls “The Central North American Republic.” Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.

    The chances of this happening stand at 55 – 45%. (I wonder if Las Vegas will take this bet?)

    “Interest in his forecast revived this fall when he published an article in Izvestia, one of Russia’s biggest national dailies. In it, he reiterated his theory, called U.S. foreign debt “a pyramid scheme,” and predicted China and Russia would usurp Washington’s role as a global financial regulator.”

    Crazy stuff, not if you look around and see all of the chinos buying up our RE in Socal.

    If anything, take a look at the map in this article…

    Mucho love,

  • Perks you read my mind and since nobody else in CA. has the cojones to say it how about doing something about all the ILLEGALS in this state who are consuming copious amounts of services including incarceration and driving the unemployment rate up and wages down by taking an undeserved and illegal share of the employment opportunities in this state.
    How high or in what level of denial must you/we indulge in to deny the effects of this on our economy???
    LLewis I can’t imagine what you’re thinking.
    In CA the top 1% pay 50% of the personal income taxes.

  • The other BIG issue you need to worry about in CA. is the huge push to go “green” especially anthropogenic global warming. A huge business and quality of life killer. People have no appreciation for how crazy and out of touch our “representatives” in Sacto. are.
    I knew we were doomed when THE YEAR AFTER Arnold declared a statewide emergency because of massive crop failures caused by subfreezing temperatures he pledged the state to address the absolute crisis of global warming.
    All those roids took their toll evidently.

    Imagine how cold it would have gotten if we hadn’t had all that global warming to stand between us and the icicle fairies!!!

  • Agree on the bailout. What are they going to do, let the largest state in US go broke while bailing out AIG? There are only 50 states, and probably two of them are solvent–Alaska and UAE. $1,000,000,000,000. Just like that–it’s done. Don’t even have to print it–just e-transfer to 49 state treasuries. Politicians can’t cut spending. Remember Graham-Rudman? Graham turned out to be one to shatter Glass-Steagall and put this whole thing in motion for his Enron-wife. If that’s the kind of guy we count on for fiscal responsibility, bailout is on the way.

  • Inflation in the next couple of years will hold up (or increase) house prices, no?

  • Amazing stuff here. Happy to be able to grab some honest and real information. Its not alway easy for a layman like myself to sift through all that is available these day. I have nothing to add other than an appreciation for all of the intelligent people posting here. And of course Dr. Housing, you are the best. I wish I had found this blog years ago.

  • “Consumer psychology is much more fragile now. That is, many people now believe that no, real estate does not go up forever. This is probably irretrievably damaged for a generation keeping another real estate bubble from forming anytime soon. Housing prices are still tanking and believe it or not, many metro areas in California are still wildly overpriced. “

    Absolutely right, and you can move all that reasoning over onto the stock market because it’s exactly the same story there. The general public will never get back into stocks in the same way now that they’ve been burned badly twice in a decade, and most of the stocks out there still have a good ways to fall.

  • I truly hope you are a ski bum as we will get along very well. I agree with your position and you have laid out the argument in a hard to argue with fashion. I feel like the market has further to go. My market in Jackson Hole is somewhat different than the nationional market but we of course are still heavily affected. If you get the chance read my blog at http://www.realestatejackson.com . Thanks for the good reading.

  • Overall I think the data you provide supports the current negative outlook. But one data point that may misrepresent the situation is the RE license data. My understanding is CA upped the RE license requirements near the end of 2007. This may have artificially boosted the numbers taking the test in the time frame noted. Not a big change to the overall situation, but something worth noting.

  • First off let me say I truly respect all your work here on, I love your insights. I have been negative on real estate since 2005 but I am now turning that coner. Do you realize you can buy properties in California less than ten minutes from San Francisco, CA that cash flow with as little as 10% down on a 30 yr fix. you can buy condos in the East Bay for less than 100,000 that were selling at 300,000 at the peak and 100,000 in the mid nineties. You can buy homes in Arizona single family that are cash flow cows, value that have dropped more than 60% I think if you are selective you can set yourself up very nice now for a huge return in 5 years. I think if you sit on the sidelines to much longer you will miss out. Obama will enact a plan mutual fund companies are allready buying huge amounts of foreclosed properties in the Central Valley 200-400 at a time for pennies on the dollar.

    Don’t stay to negative for to long. I have been negative on housing sine 2005 but have turned the corner for 2009

  • DrHB, Great post as always. How much more bad news can there be? I have decided to open a new blog, for Santa Monicans who think their area is different. It includes the area North of Montana Avenue and is called “The 90402” . Lot values have started to drop in this exclusive zip code also. But, of course “Our area is different”. I guess we will see, won’t we.

    You can check it out at:
    http://www.santamonicameltdownthe90402.blogspot.com

  • Alexander Dombroff

    I was hoping Obama speculation would pull us out of a stock market slump, but with his approval rating below 60%, I don’t think that will happen soon.

  • I want to buy in Huntington Beach or Fountain Valley, but prices still seem too high compared to other locations. I do understand coastal living is higher. I had a home in FV which we paid 260 for in ’92, but sold in 2000 for 360. I want to get back, but prices are still in the 600K. Even REOs & foreclosures are in mid to high 500K. Does anyone think the prices will drop more? How long should i wait before buying?

  • Val, I know that if you wait and continue to look, you will find a house that suites your needs. I live in the Rancho Palos Verdes area and I have noticed that the housing prices are still dropping. So if you are patient, you will find what you are looking for.

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