Unemployment Analysis & Charts - SF Bay Area & US - Any better?

43 Replies

It might not feel like a jobs boom to many, but damn! Does it get much better than this!?
Check out the historical unemployment charts for the United States, California, San Francisco, and the greater Bay Area.. Some interesting stuff! Wonder what the Fed is going to do next time.. Just a reminder of where you are buying in the economic cycle :) (If you don't care about CA or the SF Bay, skip to the bottom for US)

I'm not a chartist, but I was surprised how regularly unemployment in CA reverts relatively quickly after getting down to almost exactly 5.0% in the last few decades.. 5.7% as of Nov 2015. If CA unemployment continues it's current pace of dropping about 10-20bp per month, it would be back at 5% by Summer 2016. Again, who knows.. But interesting.. And look how fast unemployment goes up, relative to how slow it goes down!

*Keep in the back of your mind while reading all this that the Fed has ALWAYS lowered rates at least 300bp (3%) in every past recession to cushion the fallout.*

For San Francisco... wow! Bouncing from 3.2% to 3.4% with what looks like some seasonal fluctuations.. Past the 2006 boom, and approaching tech bubble levels. Good times! The winds are at our back folks, and historically, they don't blow much more, before they start blowing in our face! How much lower does it typically get, how long does it stay that way, and what tends to happen afterward? What is that grey area..? Hmmm..

That's just SF J! What about the rest of the Bay? Well.. things are booming!
Here's the SF / Oakland / Fremont MSA Unemployment rate. At 3.9% now, it has bounced around the 2006 boom levels. A year ago in Nov 2014, it was 4.9%, a full percentage point higher. It has only gone below 2.9% briefly leading up to the tech bubble. We'll see if it gets back there, and what happens afterward..!

Silicon Valley - The San Jose / Sunnyvale / Santa Clara MSA. Doing great also at 4.0%! However, this is the first one that looks like it is starting to lose it's steam, interestingly enough. Historically, it has gone lower in prior booms, and has sputtered in the past, before steaming ahead to the end, then entering a recession. So maybe it still has some room to go. It was at 4.9% a year ago, almost a percentage point higher. It's only breached 3% in the tech bubble. (This is a seasonally adjusted smoothed chart, like the CA chart, so I'll get the regular one later..)

But J! That's just the Bay Area!
The rest of the country is just recovering from the last crisis still! OK OK.. Here's nationwide unemployment. Not quite as "on the verge" as SF and the Bay, but hmmm... Down to 5.0% in Nov 2015. In Nov 2014, it was 5.8%. If continuing at that rate, it would be down to 4.2% by the end of 2016 - and only breached that level in the hot '99/2000 market, which is the lowest unemployment watermark for almost all areas. As low as 4-5% in the last 3 recessions.

The Sky is Falling!!!!
This is not any sort of dooms-day calling for RE or the economy. It's a simple statement that just like unemployment, jobs, incomes, and RE, things go up.. and things go down.. cycles. Are we in the early, middle, or late stage of an expansionary cycle? What's the Fed going to do next time when they can't lower rates 300bp or more to help the economy out? (negative rates? buying securities more broadly?) It seems like a lot of long-term investors make more money buying when the charts are the other way around. So go enjoy yourself for a bit, sock away some cash, and I'll see you in a couple/few years! ;)

@Minh Le , do you see the same kind of regularity with unemployment as you do with HAI? It seems like they have some barriers that come around at the top of each cycle, then tend to revert afterwards.. What do you think about the slowdown in the SJ MSA?

J,

You're such an alarmist.  We're fine.  The tech boom still has legs.  China and the world will continue to pour money into Bay Area real estate.  Blah, blah blah....Okay, I'm just messing with you bro. :>)

If you look at the indicators, everything is pointing to one direction.  We're approaching the top.   We still have historically low inventory in the Bay Area, which helps drive up prices.  For the doubters, we had low inventory in 2005 too.  The good thing is that loan underwriting has been stringent so future defaults will not be as bad.  The Fed will not have to cushion us with a 300bp cut.  Wait, they don't have 300bp to cushion.  LOL!

It's apparent that the moment inventory picked up, home prices would get soften almost immediately.  Unfortunately, no one knows when the inventory would pick up.  I have my theory, but I'll have to charge you to share it.  

I think the Fed raised rate a little late. They should have done it a couple quarters ago, which would give them a little more ammunition during the next down turn. Remember our previous discussion about 30-year fixed mortgage at 2.75% in the next recession. We're going the Japan route as it's the least painful way. We're in a balance sheet recession. How are we going to dig ourselves out?

Provoking thread!

J,

Have you notice the amount of new investor wannabes, and everyone is chasing yield by looking for rentals in the tertiary market such as the Central Valley?  This coupled with the interest rate increase in the coming quarters will bring the California HAI down to the magic number 17% very fast. 

Just remember to "be fearful when others are greedy, and be greedy when others are fearful."  As the patterns on your charts have shown time and time again, human behaviors don't change be it the Great Depression or the recent Great Recession.  When people say it's different this time, just remind yourself that "It's never different this time."

Cheers!

Good post. Personally, I believe the tech bubble will burst which will deeply effect the Bay Area economy in employment,housing inventory, and multiple other factors. 

accidental double post

Here are the number of employees down in Silicon Valley. San Jose - Sunnyvale - Santa Clara metro. We are coming up on the data anniversary of Silicon Valley just about to cross the maximum number of jobs it ever had, during the tech bubble leading up to 2000 (that's right! getting back to 15 years ago folks!). Look at that line go from the lower left to the upper right! I wonder if that has anything to do with RE prices in the area.. Well look below!

Funny how it looks like there is a correlation between jobs and RE prices..

Percentage increases in RE prices are higher when job growth is higher. When job growth goes negative (losing jobs), real estate either flattens or goes down. Percent change from a year earlier for each..

And again, it seems like what goes up, must come down for unemployment..

And great point to reiterate @Minh Le . How is the Fed going to save us this time? In the last 3 marked recessions, over the last quarter century, the Fed has brought rates down at least 500bp in each one! Wow! Look at the little line at the end. That's the recent Fed rate rise! lol

Negative Rates! :) Negative Rates! :) Maybe expanding the breadth of their securities purchases beyond $1.X T(rillion) in Agency MBS and $2.XT in Treasuries to other types of securities? Drastic times call for drastic measures!!!

Great analysis and graphs J. Looking to hear what @Amit M. has to say about this.

Unemployment vs RE Price - Silicon Valley

You can pretty clearly see the inverse relationship between the unemployment rate and real estate prices in Silicon Valley, and I'm sure the chart will look the same around the SF Bay, and several other parts of the US. (Shouldn't be a shocker. But I was shocked by how pronounced the inverse relationship was, once it was charted.) Prices tend to peak when unemployment is at its lowest, then prices tend to flatten or drop when unemployment goes up. In the most recent recession, unemployment increased more, and to a higher level than the dot-com, and prices had a much more significant drop during the financial crisis than the prior small bump during the dot com bust.

Blue unemployment on left axis, and red 1995 indexed Silicon Valley home prices on right:

If you look back to when we were leading up to the dot-com crash, you'll see that Silicon Valley maintained unemployment below 4% for almost an entire 5 years between 1996 and 2001. And we just hit 4% recently. However, look back up at the Fed Funds graph, and you'll see the Fed slowly brought down the rate between 1995 and 1999. And didn't start to raise rates until we were already at that level for going on 4 years.. I don't think the Fed can be quite that accommodative this time!

Originally posted by @Minh Le : <chopped by J>

J,

...If you look at the indicators, everything is pointing to one direction.  We're approaching the top.   We still have historically low inventory in the Bay Area, which helps drive up prices.  For the doubters, we had low inventory in 2005 too.  The good thing is that loan underwriting has been stringent so future defaults will not be as bad.  The Fed will not have to cushion us with a 300bp cut.  Wait, they don't have 300bp to cushion.  LOL!

...It's apparent that the moment inventory picked up, home prices would get soften almost immediately... Provoking thread!

Well put Minh! They've actually brought down rates at least 500bp the last 3 recessions in the last 25 years, and at least 300bp for the LONG run!

I'm not a particular fan of that Bruce Willis move where they go on the Asteroid to drill and blow it up, but I saw it recently, and when they're busting drill heads trying to get through some iron in the crust of the asteroid, "bad-***" Bruce Willis reassures his crew:

"Bad-***" Bruce: "We'll be fine. There can only be 300 meters more of ferrous iron ore left below the surface."
Drilling Guy: "How do you know that? We've never been here!"
"Bad-***" Bruce: "Because if there's any more than 300 meters, we're screwed!"
hahahahhahhahahahhahhahah 
Seriously though, let's hope the Fed doesn't need any more ammo than it will have when the time comes!..

Appreciate your analysis and putting this together!

I'm also a bit surprised by how closely the two graphs track. Keep in mind that the higher end areas (prime SF, Palo Alto, atheron, etc.) decouple to a certain degree from the unemployment rate (wealthy people with equity and a lot of money aren't selling homes under duress as fast as regular folks.)

@J. Martin just closed on a solid deal for an SFH in Bayview. So good deals do exist, but mostly off market, they are fleeting (here now, gone in seconds), and the gods need to be smiling at you a bit :)

So yeah, go ahead and travel and have fun J.  I doubt you'll miss too much (except those emails with all the killer deals we will score in your absence!!)

Originally posted by @Amit M. :

I'm also a bit surprised by how closely the two graphs track. Keep in mind that the higher end areas (prime SF, Palo Alto, atheron, etc.) decouple to a certain degree from the unemployment rate (wealthy people with equity and a lot of money aren't selling homes under duress as fast as regular folks.)

@J. M.   But I think J is doing all these mind acrobatics to convince himself that he won't miss any deals in 2016 while he cavorts around the world ;)  (we should send him emails while he's away like, "J, too bad you're not here. Just found a perfect off market 4 plex for you in downtown Oakland...no RC, awesome units, old time owner just want a quiet sale."). Ha ha ha!

But in all seriousness, yes it's not an easy time to find a good deal now for all the reasons we know, but good deals are still created.  I got my last triplex this past October and  

@John Barnette just closed on a solid deal for an SFH in Bayview. So good deals do exist, but mostly off market, they are fleeting (here now, gone in seconds), and the gods need to be smiling at you a bit :)

So yeah, go ahead and travel and have fun J.  I doubt you'll miss too much (except those emails with all the killer deals we will score in your absence!!)

 Amit, I highly respect your opinion, and I know you're playing in this market. However, I have a hard time seeing the "decoupling" of high-end SF home prices from unemployment in the data I'm reviewing.

Below, I have pasted 2 graphs with data from SF (high-tier home prices only) and a different Bay Area MSA with all home transactions, beautiful and crappy - against their respective unemployment rates. But I cut off the locations so we can play a fun guessing game!!!

For sh*ts and giggles, can you tell me which graph below decouples from unemployment?
Red line is unemployment (left axis). Blue line is home price index.

Look at the relationship and the shape! I'm having a hard time telling the difference..

I have believed this theory that higher-end properties are less susceptible to downturns or unemployment. But I'm having a harder time seeing it in the actual data that is available to me. Maybe I'll send Patrick Carlisle at Paragon some of this and see if he has some data that supports the theory. I think if anyone, he would know it.. Unless @Minh Le happens to have researched it before..?

This post has been removed.

@J. Martin   are you back from your around the world sojourn   if so welcome home and I hope it was everything you wanted it to be.

Originally posted by @Minh Le :

J,

We're going the Japan route as it's the least painful way. We're in a balance sheet recession. How are we going to dig ourselves out?

 Agree with everything stated. If we go the Japan route, that implies rates will stay ultra low indefinitely with deflation or at best stagflation for decades. Value add and cash flow will still (and always) be viable strategies in different proportions depending on the market, but say bye bye to price and rent appreciation if this is true.

How will we dig ourselves out? Same way we always do, we'll innovate and invent our way out, and we are much better and faster at that game than Japan, especially in SF. I just hope that the real technological innovations lift us up before the creative finance innovations to kick the can down the road finds the cliff edge.

BTW, which measure of employment are these referring to? Be aware that different measures exclude some things that ought to be counted (IMO) and can highly distort the picture. If you are out of a job and decide to quit looking for work are you still unemployed? I think so, but some measures may disagree :)

J,

I believe the index on the right hand side of your charts gave away which market is which. However, the chart patterns are little rally the same.

Unfortunately, I deleted most graphs and data that I compiled back in the days, but I still remember them. The data was broken down into 3 tiers: high-, mid- and low-ends. All markets in the Bay Area corrected during the Great Recession. The low-end market corrected the most while the high end corrected the least. When the market rebounded, the high-end market was the first one took out 2006-2007 peak prices. I can probably dig up those charts, but it will cost you. At a minimum, it has to be Texas Roadhouse, but I would prefer Espetus. :>)

@David Faulkner , I'm honor that you agree with my assessment. To say that we're going the Japan route is somewhat negative. However, I believe we will have low inflation for years and possibly decades to come. We will fair better than Japan no doubt about that due to our innovative culture.

With respect to the unemployment data, no doubt there's a huge flaw with our government method of compiling the data. How can people who have exhausted their unemployment benefits but haven't found a job just fell off the unemployment list?  :>)

I know some people are waiting for the magic 17% HAI, but we will likely not going to see it this time around IMO. Three counties that I'm tracking, San Francisco, San Mateo and Santa Clara housing markets are at the cusp of the HAI as we speak. 

If history is any indication, there's a decent probability of 2016 peak RE price and recession in the second half of 2017. Why do I say that?

Great Depression 1929. The next recession was 1937.

Great Recession 2009. The next recession _________?

80 years super cycle? Something only happens once in a lifetime? Do human behaviors/psychology change with each cycle? Is there possibly a correlation? I have no clue. I'm not an oracle. I just look at charts, overlay them and let my brain go wild. It's fun and can be rewarding.......at times.  

Cheers.

Originally posted by @Minh Le:

J,

Great Depression 1929. The next recession was 1937.

 ...and the only thing that got us out of the recession in 1937 was WWII ... I hope that 2016-2017 doesn't repeat history in this way, but suspect it might very well which is a really scary thought. RE and A&D should do fine, and I'm in both (RE investments & A&D W2). Excellent analysis Minh, J, and others! I agree yet hope you're wrong, but prepared in case you're right (or wrong).

@J. Martin  this is my answer also "All markets in the Bay Area corrected during the Great Recession. The low-end market corrected the most while the high end corrected the least. When the market rebounded, the high-end market was the first (one took out) to surpass 2006-2007 peak prices."

There are lots of charts and calculations out there, but as you know, they can be deceiving. It's not black and white, but rather a mish mash of gray that changes in real time  

Maybe a stupid question... what does HAI stand for?

This is by far the best thread I've read on BP and the state of the SF-Bay area markets.  I get tired of people "predicting" things while not furnishing any data.  You, gentlemen, leave little doubt in your arguments.  Thanks!

Originally posted by @Michael Wear :

Maybe a stupid question... what does HAI stand for?

Hi Michael,

HAI = Housing Affordability Index.  I think we're approaching the upper threshold for San Francisco, San Mateo and Santa Clara Counties.  If history is any indication, we should have reached the peak by now.  Unlike previous housing recovery, where interest rates moved higher in the last 2-3 years of the cycle, interest rates have been trending lower for this recovery.

To put things in perspective, When HAI is in the 40's, it indicates we're at the bottom of the housing market for Santa Clara county, and 15-16 indicates the top.  This means that at the bottom of the housing market, 40ish household can afford to buy a house.  At the top, 15ish household can afford to buy a house.

San Francisco's numbers are even more insane.  HAI of mid 20's indicates the bottom while 9-10 is at the top.  San Mateo is 28-30 for bottom, and 11-12 is top.  

RIGHT NOW, they're 13, 16 and 22 for SF, San Mateo and Santa Clara counties, respectively.  The low interest rates have really helped out with the HAI.  So place so bet accordingly.

Best of luck.

Originally posted by @J. Martin:

It might not feel like a jobs boom to many, but damn! Does it get much better than this!?
Check out the historical unemployment charts for the United States, California, San Francisco, and the greater Bay Area.. Some interesting stuff! Wonder what the Fed is going to do next time.. Just a reminder of where you are buying in the economic cycle :) (If you don't care about CA or the SF Bay, skip to the bottom for US)

I'm not a chartist, but I was surprised how regularly unemployment in CA reverts relatively quickly after getting down to almost exactly 5.0% in the last few decades.. 5.7% as of Nov 2015. If CA unemployment continues it's current pace of dropping about 10-20bp per month, it would be back at 5% by Summer 2016. Again, who knows.. But interesting.. And look how fast unemployment goes up, relative to how slow it goes down!

*Keep in the back of your mind while reading all this that the Fed has ALWAYS lowered rates at least 300bp (3%) in every past recession to cushion the fallout.*

For San Francisco... wow! Bouncing from 3.2% to 3.4% with what looks like some seasonal fluctuations.. Past the 2006 boom, and approaching tech bubble levels. Good times! The winds are at our back folks, and historically, they don't blow much more, before they start blowing in our face! How much lower does it typically get, how long does it stay that way, and what tends to happen afterward? What is that grey area..? Hmmm..

That's just SF J! What about the rest of the Bay? Well.. things are booming!
Here's the SF / Oakland / Fremont MSA Unemployment rate. At 3.9% now, it has bounced around the 2006 boom levels. A year ago in Nov 2014, it was 4.9%, a full percentage point higher. It has only gone below 2.9% briefly leading up to the tech bubble. We'll see if it gets back there, and what happens afterward..!

Silicon Valley - The San Jose / Sunnyvale / Santa Clara MSA. Doing great also at 4.0%! However, this is the first one that looks like it is starting to lose it's steam, interestingly enough. Historically, it has gone lower in prior booms, and has sputtered in the past, before steaming ahead to the end, then entering a recession. So maybe it still has some room to go. It was at 4.9% a year ago, almost a percentage point higher. It's only breached 3% in the tech bubble. (This is a seasonally adjusted smoothed chart, like the CA chart, so I'll get the regular one later..)