Real estate downturn leaves a barren economic landscape
The Promenade Shops at Dos Lagos opened two years ago in Corona, aimed at serving the legions of people moving into upscale new housing tracts in the surrounding hills.
Discount center it isn’t. This is where you go to find a $3,300 home espresso machine at Sur La Table, a $500 handbag at Coach or a $6 cup of Pinkberry frozen yogurt.
Harder to find are paying customers. On a recent weekday afternoon, most stores had fewer shoppers than salespeople.
Outside the Starbucks, Melissa McVicar was selling sunglasses from a cart, $12 a pair. Five hours into her shift, McVicar had sold only six pairs. And most of her customers weren’t paying cash.
“People are buying on credit, even if it’s only $12,” she said.
A year after the median home sales price in Southern California started to go down, Dos Lagos is a good example of how the housing slump is spreading into the broader economy. New housing developments were supposed to have brought thousands of big-spending residents to the area. But only a fraction of those houses were actually built and sold, leaving the rolling hills around the mall bulldozed and bare.
That means retailers won’t sell as many goods or hire as many people, which lessens demand for other goods and services. It’s just this sort of ripple effect that’s behind California’s rising unemployment rate, which hit a 12-year high last month, economists say.
And it all traces back to the housing downturn.
For every area job lost in construction, real estate or banking, three other positions will disappear, according to the U.S. Department of Commerce.
“There’s a multiplier effect with housing. When a job is lost in real estate it ripples throughout the economy,” said Sung Won Sohn, an economist at Cal State Channel Islands in Camarillo.
Sohn estimates that 1 out of 8 jobs in Southern California is related in some way to housing, and as much as 80% of a median household’s net worth is in the family home. So if a carpenter or real estate agent loses a job, it can lead to employment losses in fields such as retailing and restaurants as spending declines. Individuals and families will also spend less if their home values decline.
Tens of thousands of jobs have been lost in the sectors most directly tied to housing -- construction, banking, retail and real estate -- in the last year alone, driving unemployment up to 8.1% in Los Angeles County and 8.9% in the Inland Empire. Local governments have also cut jobs as sales tax collections have slowed.
Statewide, housing-related job cuts pushed the California unemployment rate to 7.3% in July. More jobs were lost in construction than any other sector in the last year, according to the California Employment Development Department. Total construction sector employment in July was down 83,100 jobs, or 9.3%, from the same month a year earlier.
The second-largest drop in employment came from the financial sector, which includes mortgage banking. That sector lost 35,400 jobs in July compared with a year earlier, a 3.9% decline.
Unemployment probably will continue to rise through 2009 and then decline in 2010, said Chapman University economist Esmael Adibi, and rising unemployment will drive further home price declines, he said.
“The bad news in housing so far happened because of mortgage resets and financial reasons,” he said, as borrowers defaulted on mortgages they could not afford. Those housing losses occurred even while employment remained strong.
That’s changing as more are put out of work. “Now, the problem is the real economy. People who could have made their mortgage payment even with the reset lose their jobs or their spouses lose their jobs and [they] can no longer pay their mortgage,” he said.
Adibi predicts unemployment will rise by about half a percentage point in Southern California.
Another trouble spot is declining tax revenue, which would probably lead to government job cuts. State sales tax data, currently available only through the second quarter of 2007, showed such revenue increasing by less than 1% from 2006, compared with growth of 5.4% from 2005 to 2006. Sales tax collections were down 3.5% in Riverside County in 2007 from the previous year, and 3% in San Bernardino County.
Adibi said this year’s numbers probably would show a greater decline, and property tax collections were also likely to fall with home values.
Jack Kyser, chief economist of the Los Angeles County Economic Development Corp., thinks job losses may be much worse in the Inland Empire, where a higher percentage of jobs were tied to real estate. Kyser also thinks the jobless rate won’t improve until 2010.
He said the unemployment rate in Riverside and San Bernardino counties could rise above 10%.
And that would only add to the glut of unsold homes in the Inland Empire. “They have a tremendous inventory overhang,” Kyser said.
There is also the possibility of store closings and staff cuts at the many retail complexes, like the Promenade at Dos Lagos, built to serve communities that didn’t materialize. “The retailers were chasing the rooftops,” Kyser said of stores built near new housing developments, “but all of a sudden they found no one is living under those rooftops.”
Ricardo Chance, a managing director of KPMG Corporate Finance in Costa Mesa who helps builders restructure troubled projects, also said a recovery for real estate and the local economy wouldn’t happen soon. Among both lenders and builders, “no one really knows where the bottom is” for housing.
In the last few months, Chance said, investment funds have become interested in purchasing distressed housing developments at discounts, which may signal the beginning of a slow turnaround for large-scale projects.
But Chance said the market for individual homes wouldn’t correct soon. That’s because home builders and investment funds considering major projects will make buying and selling decisions quickly, based on numbers. “It’s a more efficient market. It’s not emotionally charged,” he said.
Homeowners, on the other hand, often won’t cut prices fast or deep enough to sell their houses, Chance said, and home buyers might seek prices that are unrealistically low.
UCLA economist Edward E. Leamer believes that job losses will continue to grow slowly through 2009 but that the worst job losses -- mainly in construction -- have already occurred.
He believes economic recovery will require a cultural change. During the real estate boom, he said, consumption rose dramatically while investment in things like factories and industrial equipment, which generate long-term economic growth, declined.
“A large part of our growth came at the expense of future growth,” Leamer said of the borrowed money spent on depreciating houses, cars and restaurant meals. “This could be the moment of a radical shift, if people realize their spending was inappropriate,” he said.
Leamer sees at least a couple of years of tough economic times for Southern California. Real estate fueled the last boom, but now “there isn’t another locomotive, a force that allows us to move forward,” he said.
“While we’re weaning ourselves from housing we’re trying to find a new driver. That will take a long time.”