Tuesday, April 8, 2014

Blog post assignment #2

The Recovery of California Housing Market

It is no secret that the sub prime mortgage lending that facilitated the Great Recession has left housing markets in many communities across the nation struggling to recover. It is also well known that the sub prime mortgage bubble hit California particularly hard when it burst. Some areas of California such as San Francisco, that were hit hardest are now recovering, if not fully recovered, while other areas of California like Modesto are still feeling the impact of the housing crisis and are still struggling to recover  from the sharp decline in housing values. So, why would some areas of California recover quicker than others?

Employment is one of the many factors that contribute to the growth within a region. In places where the economic base is an industry like technology such as San Francisco, or San Jose, the unemployment rate is less than the national average.  According to Andy Winkler in his report for americanactionforum.org (2013), “metro areas like San Jose and San Francisco, buoyed by growth in the technology sector, have unemployment rates below the 7.2 percent national average…”  Whereas a place in the central valley like Fresno, where the economic base is agriculture, tends to have unemployment rates greater than the national average.  According to Andy Winkler (2013), “metro areas in the Central Valley like Fresno, Bakersfield, and Riverside all have unemployment rates still above 10 percent…” This is important to the housing market because basic employment is going to be the engine for population growth and the demand for housing. So, the housing market in a location that has high paying tech jobs as the basic employment may recover faster than an area where the basic employment is field workers.

Different areas also have different competitive advantages that attract people and businesses such as the workforce in a given area, the natural resources, climate, transportation and public policy. Any one of these can affect the population in a region thereby affecting the demand for real estate in that region.

Construction is also good signal for growth in a region. Increases population, due to expected job growth or from one or more of the many aforementioned competitive advantages, means new demand housing, which in turn will increase the amount of construction. Morgan Brennan mentioned the impact of job growth and an increase in the San Jose population on San Jose’s home construction in a recent Forbes article stating (2012),” Job and population growth are fueling housing demand: New home construction in the area was up a whopping 97% in 2011’s third quarter...” Since then San Jose seems to have completely rebounded. San Jose has been averaging 621 building permits per month whereas before the recession San Jose had an average of 435 per month (Winkler, 2013). Now compare that to a place like Modesto which has been issuing building permits at 7% of their average before the recession (Winkler, 2013). Places that aren’t building new homes aren’t growing much. Housing construction is a key signal to the growth of or stagnation of a city.

There are a multitude of reasons why some cities in California are recovering faster than others from the recent economic downturn that was caused by the housing crisis. Basic employment, increases in the population, and construction all play a vital role in the economic growth off a city. So, I don’t think any one reason would suffice as to why some cities are recovering faster or better than others. I believe that it is a combination of these factors as well as the competitive advantages of a particular place.

Brennan, M. (2012, January 12). Cities Where Real Estate Is Ripe For A Rebound - Forbes. Retrieved from http://www.forbes.com/sites/morganbrennan/2012/01/12/cities-where-real-estate-is-ripe-for-a-rebound/

Winkler, A. (2013, November 14). One Year Later: An Updated Look at the Housing Recovery in California | Research | American Action Forum. Retrieved from http://americanactionforum.org/research/one-year-later-an-updated-look-at-the-housing-recovery-in-california

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