Monthly Archives: April 2012

Progress on Foreclosures

The weak state of the national and California real estate markets continues to be the principal reason that the recovery from the Great Recession has been so disappointing.  To underscore this fact, according to Standard & Poor’s Case-Shiller home-price index, U.S. home prices ended 2011 at the lowest levels since the housing crisis began in mid-2006. Despite historically low mortgage interest rates, housing markets have been beset by a weak job market, abundant foreclosures, and tighter mortgage requirements.

On the other hand, the news is not all bad.  In January, national pending home sales—a leading indicator of existing home sales—rose to their highest level since April 2010, according to the National Association of Realtors.  Completed home sales reached 4.57 million units in January, the highest level of sales since May 2010, when the housing market was lifted by federal tax credits.  The supply of homes available for sale in January fell to its lowest level since January 2006.

California roughly mirrors the nation.  Real estate conditions have improved substantially from the depths of the recession, with the exception of home values which remain depressed.   The $268,300 median sales price of existing single-family homes sold in January 2012 was only slightly higher than the lowest price recorded at the depths of the housing crisis—$247,600 in February 2009.


An important factor weighing on home prices is the still frustrating level of foreclosure activity.  Home foreclosure action began heating up in late 2005 when home sales slowed dramatically.  Foreclosures in California escalated rapidly in 2006 and then skyrocketed to unprecedented levels in 2007 and 2008, and then peaked in 2009.  Lenders sent out nearly a half million default notices to California homeowners in 2009—more than seven times the number sent in 2005.  Defaults declined significantly in 2010 and 2011.  However, with 258,000 notices issued in 2011—a 15 percent drop from 2010—the pace was still more than three times greater than in 2005.

Moreover, the drop in notices in 2011 may overstate how much housing conditions have actually improved.  The revelations, investigations and settlement negotiations surrounding the ‘robo-signing’ foreclosure scandal caused some lenders to institute foreclosure moratoriums and otherwise slow the foreclosure process.  Some mortgage servicers began letting delinquent borrowers fall a year or more behind on their payments before taking action.  More servicers began accepting short sales—selling a home for less than the value of the mortgage—rather than pursue foreclosure.   There may remain a larger stock of troubled mortgages than appears.  While the full impact of the recent ‘robo-signing’ settlement between the five largest mortgage servicers, 49 states’ attorneys general, and the federal government is still unclear, it will likely lead to an increase in distressed sales in the near future, which could result in further downward pressure on home prices.  It could, though, also accelerate the ultimate real estate market readjustment needed for a recovery of California’s housing markets.


Although no region of the state was left unscathed by the financial crisis and recession, the impacts were not evenly spread.  The most vulnerable areas were those whose growth had been most dependent on home building activity during the run-up from 2002 through 2005.  These were predominantly the inland regions that became the preferred destination for households moving from high-priced coastal communities in search of more affordable housing.  Unfortunately, the resulting job growth in these destinations was heavily tilted toward home building and related industries such as retail sales.  In the Riverside-San Bernardino-Ontario metropolitan area, retail trade employment at building materials and garden equipment stores expanded nearly 44 percent from 2001 to 2006—almost twice the pace of overall job growth.  Statewide, employment in this sector grew only 18 percent.  Thus, it was not surprising that these regions suffered the most from the housing market collapse.  These contrasts are clearly reflected in the regional pattern of foreclosures.

The Central Valley, which stretches from Colusa, Sutter, and Yuba counties in the north down to Kern County in the south, bore the brunt of the housing meltdown.  Based on notice of default actions taken on a per capita basis, the Central Valley suffered the greatest increase in foreclosure actions—rising from nearly two actions per 1,000 residents in 2005 to over 16 in 2009, the peak year for foreclosures.  Even though this area improved the most in absolute terms since 2009, it still suffered the second highest foreclosure rate in 2011, 9.1 actions per 1,000 persons.  This is also nearly three times the 2000-2005 pre-collapse rate of 3.3 actions per 1,000.

The Southern California region encompasses diverse areas from the coastal communities stretching from Ventura to San Diego to the Inland Empire.  The foreclosure rate for the region as a whole rose considerably from 2005 to 2009, but significantly less so than in the Central Valley.  The foreclosure rate rose from nearly 1.6 actions per 1,000 residents in 2005 to 12.4 in 2009.    These are aggregate figures, though.  This region includes Riverside and San Bernardino counties, both of whose foreclosure rates undoubtedly rivaled that of the Central Valley.  Be that as it may, this area’s rate improved almost as much the Central Valley—falling nearly in half between 2009 and 2011.

The Mountain Region lies predominantly along the California-Nevada border north of San Bernardino County.  Even though this region fared marginally better than the Central Valley during the housing meltdown in 2007-2009, it hasn’t recovered as quickly as most other areas.  Its foreclosure rate in 2011 was comparable to that of the Central Valley, 12 actions per 10,000 residents.

The San Francisco Bay area and the Central Coast regions fared much better.  Before the bust, these areas weren’t nearly as dependent on construction and housing activity as the inland regions.  The foreclosure rate didn’t rise as dramatically—peaking at just over 10 actions per 1,000 residents in 2009.  During the recovery, the San Francisco Bay area benefited from above-average economic growth driven by strong investment in high technology industries and healthy export growth.  Its foreclosure rate in 2011, only 6 actions per 1,000 residents, was the lowest amongst these major regions.

The Northern California region, which encompasses all of the northernmost counties above the Central Valley and the San Francisco Bay area, had the least tumultuous experience.  It suffered the smallest increase in its foreclosure rate—rising from 1.2 actions per 1,000 persons to only 7.4.  Things improved during the recovery, but its rate in 2011 was still comparable to the San Francisco Bay Area and the Central Coast.


These regional patterns indicate which areas have made the most progress and which still have a long way to go.   The San Francisco Bay area made the most progress towards bringing its foreclosure rate down to the pre-recession levels, 6 actions per 1,000 residents in 2011.  Southern California also improved significantly, with the rate falling to 6.6 actions per 1,000.  Not surprisingly, San Francisco and Southern California were the only regions that saw an overall increase in residential building activity in 2011.  The foreclosure rates in Northern California and the Central Coast also improved to comparable rates, 6.2 and 6.5 actions per 1,000 respectively.  The Mountain and Central Valley regions, on the other hand were still hamstrung by foreclosure activity significantly higher than the rest of California, 9.1 and 9.3 actions per 1,000 respectively.


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“New Housing Breaking Ground”

Gerd-Ulf (GU) Krueger is a leading expert on California home building.  In a recent post at Beacon Economics’ No Nonsense Economics blog, New Housing Breaking Ground… But Next Shortage Is In Sight , he has some very encouraging, as well as cautionary, things to say about current residential construction trends.

  • “There is not a shred of evidence of the fabled shadow supply getting unleashed …”
  •  “…anecdotal evidence also suggests that more ground breaking is taking place in urban infill and suburban A-locations.”
  • “But there is trouble brewing on the supply side,…”
  • “If nothing is done soon, the best regional economies in California economies will soon face another housing crisis, …”

GU is the principal economist and founder of KruegerEconomics, a housing and economic advisory firm for institutional investors, developers, builders, and state and local governments.

(Read the post at Beacon Economics)

Pictured: Cherokee Mixed-Use Lofts is an urban infill, mixed-use, market-rate housing project in Hollywood.

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Hope for the jobless?

In Hiring report offers hope to California’s jobless, (Sacramento Bee, April 21), Dale Kasler highlights the March labor market report and provides a great picture of California’s “two tiered” economic recovery.

Despite receiving some long awaited good news on the housing front and adding 4,800 jobs in March, “There are still fewer people working in the Sacramento area today than a year ago – one of the few places in California where that’s true.”  But Sacramento is not alone, “Much of the Central Valley is in the same condition as Sacramento…”

In contrast, the labor force has been trending up lately, which is usually a sign of rising optimism.

(Read the article)

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California Economic Update, April 2012

The Department of Finance released its April2012 Finance Bulletin which includes the following review of the latest economic indicators for California.


California continued to experience a very measured recovery.  Employment growth continued in the first two months of 2012, but at a much slower pace than at the end of 2011.  The pace of homebuilding during January and February was erratic and subdued, but was improved from a year earlier.


In February, labor markets continued to make progress, but at an extremely gradual pace.  Nonfarm employment expanded modestly and the originally reported job loss in January was revised to a small gain.  The unemployment rate held steady.

The pace of job growth during the first two months of 2012 was much weaker than during the last few months of 2011—just 2,800 per month on average in January and February compared to 37,100 per month on average during August through December 2011.  The unusually warm winter weather likely impacted construction, retail trade, and leisure and hospitality employment.

California nonfarm payrolls grew by 4,000 jobs in February.  The originally reported 5,200-job loss in January was revised to a 1,500-job gain—a 6,700-job swing.

Four industries gained jobs, one held steady, and six lost.  The largest gain was in information, which added 9,300 jobs following an unusual 23,200 loss in January.  Other sectors that added jobs include manufacturing (6,200), education and health services (6,100), and professional and business services (2,800).

The largest losses were in government (10,300) led by a sizable drop in local government employment (6,700).  Other sectors that lost jobs include trade, transportation, and utilities (5,800), other services (2,300), construction (900), financial activities (600), and mining and logging (500).  There was no change in leisure and hospitality employment.

Nonfarm payroll employment rose by 127,300, or 0.9 percent, from February 2011 to February 2012.

Employment rose 67,700 in professional and business services; 46,800 in trade, transportation, and utilities; 39,800 in educational and health services; 19,300 in leisure and hospitality; 4,300 in manufacturing; 3,500 in information; 2,300 in construction; and 500 in financial activities.   There was no change in mining and logging employment.

Over the year, employment fell by 49,800 in government; and 7,100 in other services.

After falling in each of the five previous months, California’s unemployment rate held steady at 10.9 percent in February.


As of April 2012, the Construction Industry Research Board (CIRB) ceased operation.  At this point, residential construction data published by the Bureau of the Census will be used to evaluate California residential construction trends.

During the first two months of 2012, home building was whipsawed by on again-off again multifamily permitting.  After slowing dramatically in January, residential construction permitting rebounded in February.  According to not seasonally adjusted data, permitting of multifamily units dropped over 80 percent in January and then reversed course, rising nearly 200 percent in February.   Over the course of both January and February, residential permitting increased over 15 percent from the same months of 2011.


The news for California residential real estate markets was mixed in February.  Home prices remained weak, but sales improved modestly.  Inventory measures improved as well.

Looking at the first two months of 2012 together, existing home sales were essentially unchanged from the same months of 2011, while the median price was down 2.8 percent.

In February, the unsold inventory index inched down to 5.3 months.  The median number of days needed to sell a home dropped to 58.9 days, down 9 percent from a year earlier.

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When Home Prices Were Last This Low

This map shows the last time median home prices were at late-2011 levels, after adjusting for inflation.

Hudson Sangree and Phillip Reese recount the very disappointing housing market conditions in Sacramento (Sacramento Bee, Apr. 8, 2012).  Included with the article is the map above that gives a very clear picture of California’s uneven economic recovery.  The upper Central Valley and mountain regions took the biggest housing wealth hits are taking the longest to recover from the recession and housing market collapse.  Coastal communities are doing relatively better.

(read the article)


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California Again Leads in Venture Capital Investments (by a country mile)

In 2011, California scooped up more than half of the entire nation’s venture-backed invest­ment—for the fourth consecutive year.  National venture capital investment exceeded $28 billion in 2011, up 22 percent from 2010—the third highest amount in the past 10 years, according to the latest report by PricewaterhouseCoopers LLP and the National Venture Capital Association.   California ventures received $14.5 billion, a 24 percent jump from 2010.  The Silicon Valley received the lion’s share, $11.6 billion, rising 27 percent from 2010.

Given the nature of investment patterns in 2011, it is easy to understand why California was the far-and-away leader.  Investment growth was lead by software and biotechnology.  Investment in software companies, the largest single sector, reached $6.7 billion in 2011, a 38% increase from 2010.  The next largest investment sector was biotechnology which increased 22% in 2011, totaling $4.7 billion.

There was also strong growth in two other California specialties, Clean Technology and ‘Internet-specific.’  The latter includes companies in various industry categories that are essentially dependent on the Internet. Venture capital investment in these enterprises totaled nearly $7 billion in 2011.  Not only was this the greatest level of internet investment in the past 10 years, but was a 68 percent surge from the $4 billion invested in 2010.

Clean Technology venture capital investments in 2011 were the largest on record.   These ventures include alternative energy, pollution and recycling, power supplies and conservation ventures.  Clean Technology investments grew 12% from 2010, reaching $4.3 billion.

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