Irvine Housing Blog

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The REal Jobs Situation

I think we can all agree whether you are a housing bull, bear or giraffe that jobs and wage growth are primary factors to a healthy housing market. This has become quite the hot topic amongst the bulls and bears with various facts and myths that have been slung around. One fact is that much of the job growth in the last several years has been in the RE industry. Lansner over at the OC Register has mentioned this several times and has noted that in the last four years RE accounted for 52% of the job growth. It is also a fact that other jobs have been created but at a very weak rate. Does this seem like a healthy job market when real estate sales are down 40% from the peak, mortgage companies are going BK or laying people off every quarter and homebuilders are slashing staff to bare bone levels just to function? Well let's take a look at what I have found and you can make your own judgment.

The Data
I used the data from the EDD which gets their data from the BLS. The best info I can find on the actual jobs numbers are from this spreadsheet from the EDD. I have my own spreadsheet that uses the same data. I added the employment numbers and rates that are missing from the EDD spreadsheet and I have done several various calculations. I know it is not as organized or as pretty as some of Irvinerenter's but the data is there. For RE related jobs I use construction, credit intermediation and related activities, real estate and architectural, engineering and related services. These categories compiled together are what I like to call the RE jobs and will known as such from here.

A Little History and Some Averages

Historically RE jobs have accounted for an average of 11.5% of the total non-farm jobs in OC since 1990 to 2006.

In 1990 the average was 11.5% and did not reach that high again until 2001. In between that time the average was 10.6%.

In 2006 the percentage of RE jobs accounted for 14.2% of the non-farm jobs for a new all time high.

The reason why this is an important way to look at RE jobs and why the percentage matters is the RE industry is a need based employment sector. So in other words when jobs other than RE are being created the RE jobs would increase in number but not as a percentage. RE jobs need other jobs to be created or they would not increase and they definitely should not increase as a percentage.

From 2000 to 2006 131,200 total non-farm jobs were created and 62,400 of those jobs were RE related accounting for 47.6% of the job growth.

It doesn't make much sense when only 68,800 non-RE related jobs were created that OC would need to have that much RE jobs growth. Considering that from 2000 to 2006 non-RE related jobs grew by an amazing 5.3% and RE related jobs increased by 29%.

This clearly paints a picture that OC has been very dependent upon RE job growth in the last six years. That dependence on sector that is a need based industry when the need was self fed poses a serious risk to the overall employment in OC.

The Aerospace Myth

The typical bull mantra about the 90s was that the aerospace industry killed the housing market. This is a serious error when the numbers are not there. Manufacturing jobs which include aerospace did have a significant decline but it wouldn't call for such a steep decline in the RE related jobs or a decline in the housing market.

Between 1990 and 1993 OC had lost a cumulative total of 57,000 non-farm jobs and in 1994 only had lost a cumulative total of 45,600 non-farm jobs.

Between 1990 and 1994 aerospace had lost a cumulative total of 7000 jobs accounting for only 15.4% of the non-farm job losses.

Between 1990 and 1994 manufacturing had lost a cumulative total of 37,300 jobs accounting for 82% of the non-farm job losses.

Between 1990 and 1994 RE had lost a cumulative total of 20,500 jobs accounting for 45% of the non-farm job losses.

As can be seen in those numbers RE and manufacturing accounted for more than the cumulative total non-farm job losses. That means that other sectors were creating jobs which would create a need for RE related jobs. This didn't start to happen. The reason had more to do with housing prices and buyer psychology.

The Wage Growth Myth

The bulls all say that wages are up and people are making more money than ever. This couldn't be further from the truth when you exclude RE related jobs. I actually believed that this mythical statement might have been true. I was disturbed that when you break it down the way that I have that it shows a loss. I had to use data from 2000 to 2005 because the annual data for 2006 is not available yet.

Between 2000 and 2005 payroll wages grew by slightly over $14 billion.

Between 2000 and 2005 payroll wages for RE grew by slightly over $6.6 billion accounting for 47% of the growth.

Between 2000 and 2005 payroll wages for non-RE related jobs grew by slightly over $7.4 billion accounting for 53% of the growth.

When you break down how many non-RE related jobs there were in 2000 compared to 2005 there were 48,600 more jobs. So what you have to do is take the annual payroll and divide it on a per job basis. After adjusting for California's inflation rate of 15.9% between 2000 and 2005 non-RE related payroll wages shrank by -$662 million in that time.

Using the same break down RE related payroll wages soared by nearly $2.1 billion. This adds for more evidence that the industry was self feeding itself and how much OC was dependent upon the industry for growth. With sales down nearly 40% since 2005 it will be interesting to see this stat in the next few years.

The Overwhelming Evidence

I may be a housing bear but these are the numbers and the numbers do not lie. It can be said that a liar can lie about the numbers but that is why I provided my own spreadsheet for anyone to check the numbers. The proof is OC has had very poor job growth when excluding RE related jobs. What is even worse is wage growth has actually been negative when excluding RE related jobs. So how or why have we had such a huge run up in the prices of homes? It makes absolutely no sense what so ever and anyone who tells you that wages have been growing is lying.

The other troubling statistic is with all the layoffs and overall slow down is where will these people find jobs? The response you will hear from the bulls is they will find a new job or return to the industry they came from before. Some of the more educated and talented in the RE industry will either stay in the business or find another industry. However the majority will have difficulty finding a career that pays as well. The RE industry is more than just sales agents and loan brokers but underwriters and escrow officers. Many of the other jobs have paid well and required very little training or education. The jobs currently being created are in professional and technical services, medical services and education. These categories require higher education and unless the person who is no longer in the RE industry had this education from before they will have to get it now. This will either take job seekers out of the market to get the education needed or they will have accept lower paying jobs or be unemployed.

Now do you see a problem or is it sunny today?

The Day the Market Died

A Real Housedebtor of OC

Having grown up and lived most of my life in OC I have come to the conclusion that the people here who seem to have money can be broken down to three types of people. The first is the person who actually has money and accumulated wealth. They may be a business owner or they may have a decent paying job. They may not have the most glamorous job but they live within their means and have saved and invested well. They don't really ever mention money or talk much about material items. They also are the most humble and happiest people I meet. The second is the person with a very well paying job but they live paycheck to paycheck. They always have a newer car, nice high end clothes and the latest gadgets like a plasma TV. They are the one who will have the IPhone before everyone else. I know too many people who lived like this in the RE industry. The third is the person who lives beyond their means. These are the people who you would never know that they are dead broke but appear rich and are best exemplified by Irvinerenter's post on Cultural Pathology. The third is in the worst situation today if they own a home because they no longer have the appreciation to bail them out. They are the type that always talk about money and material things. They think this will make people like them and they believe that really one day they will be rich. The only problem is they never seem to catch up or the reality is no matter how much they believe in reality it never happens.

Why do I bring this up? Well I am not one to gossip and I really hate to admit that I have watched The Real Housewives of OC but I couldn't resist the sad facts of a person who lives beyond their means. Most of you like myself will hate to admit that you have watched the show but even if you haven't you are probably aware of Slade Smiley. He appears to be like the third type where in the show he always talks about being rich. I shouldn't be so modest because he brags about being rich and the show makes it seem this is what his life revolves around. He rents owns a house in Coto De Caza that has been listed for over 250 days and with only one price reduction. Maybe the reason it is listed is because Slade needs money and the appreciation spigot has been turned off. He bought the place in July of 2005 and less than a month after he bought the place he got a new second pulling out $20k and ten months later he got another new second extracting almost $100k for a total balance on the second of $225k. It would be obvious things are not going so well when the NOD was filed on 4/30/07 and how he owes his pay option lender $15k at the time. Of course if he only made his minimum payment it would be an additional $50k on top of the $1.28mil he borrowed for the first loan. So assuming only the minimum payment was made we have a total possible mortgage debt of $1.57mil. But wait there is more since he hasn't paid his property taxes there is an additional $20k and of course a family attorney is owed about $12k and filed a lien against the home. Now the total with the commission and fees he is barely breaking even. If all those nice suits, diamond rings, high end cars and other various OC life expenses he has some serious credit card debt on top of all that.

What happened? He was one of the people who started United Title and an assistant vice president with them. It appears they sold to Land America and he should have received a decent amount for the buy out. Plus he has a highly rated show and is producing his girlfriend/fiance Jo's singing career. Even the LA Times had recent article about how well he was doing.

The lesson is don't buy Hummers, MBZs, big diamond rings for girls who won't marry you and a house you can't afford.

Oh and I almost forgot this house was a past bubble victim when it was bought back by the bank in 1995 at the trustee's auction for $568k when the unpaid debt was $573k. The bank sold it seven months later for $540k.

Home Sales Data thru 4-25-2007

Promenade - Catch the Falling Knife in Westpark - UPDATE #1

Originally posted October 13, 2006

Address: 14 Posada, Irvine, CA 92614 (Westpark)
Plan: 2000 sq ft - 4/3
MLS: S446011 DOM: 115
Sale History: 1/6/2006: $865,000
1/29/1998: $345,000
Price Reduced: 07/25/06 -- $979,000 to $949,000
Price Reduced: 09/08/06 -- $949,000 to $929,000
Price Reduced: 10/03/06 -- $929,000 to $899,000
Current Price: $899,000

This Plan D in the Promenade tract in Westpark was purchased by our flipper early this year and then put back on the market 6 months later on 6/20/2006. When the flipper bought the property he probably thought he received a great deal on the purchase. Why? Because the prior seller had originally listed it for $968,800 and our flipper picked it for over $100k less at $865,000. What's funny is that our flipper thought he could sell it for even more than what the prior seller failed to. He put it back on the market hoping to make over $100,000!

After reducing the price a few times, our flipper has hopefully learned the risks of trying to catch a falling knife! He can only hope that he won't have to bleed too much money to get out of this. If the house sells for the asking price of $899,000 and we assume 6% in selling costs, our flipper will lose about $20,000.

UPDATE #1 - May 18, 2007

After being on the market for 271 days, 14 Posada was relisted (MLS#S480142) on 3/19/2007 for $899,000.

On May 3, 2007 the price was reduced to $869,000. After a total of 344 DOM, the price has dropped by $110,000 since it was first listed in June of 2006. It also seems like the house has been vacant the whole time.

If sold at the price of $869,000 and assuming 6% in selling costs, the seller is facing a loss of about $48,000.