Bay Area Economic Pulse
by Michael Dardia
The signs of national economic growth that have been accumulating since last fall have finally translated into robust job growth. The national employment growth for March 2004 was initially reported to be 308,000 jobs—a figure that many analysts thought would be revised downward in April. Instead, the March gains were revised upward to 337,000, and employment increased yet again by another 288,000 in April. Whatever the reason for this delayed start in our nation's job growth, the employment outlook is finally more consistent with other positive economic trends.
In comparison, employment in the Bay Area remained stagnant in the first quarter of 2004, with small job losses due partly to seasonal factors. However, there are several positive economic signs for the Bay Area: many local firms report strong sales and earnings; local media and job search sites have seen increases in help-wanted ads; commercial vacancy rates have continued to drop in most areas; and California exports of high-technology products rose by 21 percent compared to the same period last year. The area's workforce investment boards report fewer displaced workers seeking their services. The unemployment rate fell from 6.2 percent to 5.9 percent and, together with these other signs, may suggest that job gains will appear in the next month or two.
The stagnant job situation can be attributed to continuing losses in high-technology, wholesale trade and government sectors, offsetting gains in business services and retail trade (Figure A). Employment in computer and electronic product manufacturing fell by 1,200 jobs, the same annualized loss rate of 3.1 percent that was suffered ; by the information sector (covering publishing, entertainment, telecommunications and related industries). Wholesale trade lost 900 jobs and government jobs were pared by 1,500—presumably more local government layoffs and attrition due to declining budgets.
Employment expanded in industries serving the broader economy as evidenced in the following sectors: employment in business services swelled by 4,600 jobs, retail trade jobs increased by 2,300 and hospitality jobs rose by 400. As the national recovery continues to gain speed, these sectors of the economy may continue to lead the area out of the slump as business and leisure travel pick up. The resolution of the workers’ compensation crisis (even if incomplete), along with the recently improved state revenue picture and the attention paid to the state's business climate, may give California employers a bit more confidence to add workers as demand increases.
The gap between national and Bay Area economic performance remains a concern for the housing market. Interest rates are driven by national, not regional, economic factors and will continue to rise as the national economy recovers. This predicted rise in the interest rates will have an impact on home prices. The median home price in the Bay Area rose 28 percent from the first quarter of 2001 to the first quarter of 2004. More than half of this increase was due to the fall in interest rates. In February 2001, 30-year fixed rate mortgages cost 7.25 percent, and the median priced home in San Mateo County was $567,000. A mortgage then for 80 percent of the home purchase price would have cost $3,100 per month. In February 2004, the 30-year fixed mortgage rate was 5.88 percent; the same monthly payment would cover the mortgage on a $656,000 home—16 percent higher than the 2001 price. Over the same period home prices in Marin, San Francisco, San Mateo and Santa Clara counties rose by 18 percent or less, suggesting that these counties are particularly vulnerable in the face of a rate increase.
Housing production in the region has continued to increase over the past three years, despite large job losses. Should rates rise sharply, home prices will fall, especially in light of the continuing absence of any new job creation. Falling home prices can benefit those who are currently priced out of homeownership in the Bay Area. However, a fall in home prices can hurt the regional economy—directly through foreclosures and indirectly through depressing future home construction.
Worrying about falling home prices in a region with chronic affordability concerns may seem strange at this time. However, the dramatic decline in interest rates over the past two years propped up regional housing prices despite massive job losses. When Los Angeles suffered job losses of similar magnitude a decade ago, its median home price fell by 19 percent (30 percent in inflation-adjusted terms). Home prices only started to fall in the third year after the employment peak, when large numbers of residents began to leave the Los Angeles area. As discussed in the May 2003 edition of this magazine, out-migration from Los Angeles exceeded 1 percent of the area's population for four years in a row (Figure B, Los Angeles County), ultimately resulting in the loss of more than a half-million residents.
Population figures for the Bay Area now show two years of relatively small out-migration, but out-migration tends to lag behind job losses by about two years (Figure B, Bay Area). The coming year will be the crucial one for the housing market. If interest rates rise quickly or out-migration accelerates (or both), the region is at risk for a painful adjustment in home prices that will likely affect the pace of recovery. If not, rental prices are likely to start rising again once new workers are hired and demand begins its cycle again.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Michael Dardia is vice president of the SPHERE Institute, a nonprofit organization that provides analysis and advice for policy makers. He prepares this column for the Bay Area Council, a public policy organization for the 275 largest employers in the region. More information is available online at www.bayareacouncil.org. Copyright © 2004 by the Bay Area Council. All Rights Reserved.