The story of the burgeoning US housing bubbles is not simply one of asset-deflation risk. It's also a story of employment. The most frothy housing bubbles have not only generated oversized consumption founded upon equity withdrawal but have generated oversized employment in the construction and real estate sectors. When there is nobody to pay the mortgage, if and when these bubbles burst they will take down not only housing prices but houses as well.
Calculated Risk has a nice chart today showing regional housing price inflation since 2002:I. Clearly the Pacific region has the most run-away price increases, and within that region the story is nearly all about California. From 2002 to 2004 median house prices rose 68% in Riverside/San Bernardino, 54% in Los Angeles, 52% in Orange County, 52% in San Diego, 51% in Sacramento and 24% in the Bay Area. Of the top seven most inflationary markets over these two years, five are in California (and the remaining two in neighboring Nevada!).
Now we all know that California is growing in terms of population much faster than most other parts of the country. According to the Census Bureau, California's population grew 6.0% from 2000 to 2004 whereas the US minus California grew 4.1%. The job situation in the Golden State and the rest of the US is much more similar, however: +0.3% in California and -0.3% in the rest of the country.
Focusing in on the most recent two years (April 2003-April 2005), California's job growth is not impressive at all. The Golden State has seen 2.4% job growth over the last 24 months while the rest of the country has seen 2.8% growth. Moreover, the nature of the job growth in California is highly skewed toward the real estate sector. Over the same 24-month period, 32.7% of all new jobs in CA have been in either construction or real estate. In the rest of the country over the same period, 15.3% of all new jobs have been in these two sectors.
So let's sum up the California economy since April 2003. Markedly stronger than average population growth. Rampant inflation in house prices much higher than the national average. Yet weaker than average job growth and very high dependence of that weaker growth on the construction and real estate sectors. And don't forget much higher than average reliance on ARMs, very high price-to-income ratios, and falling rental prices in some markets.
In this highly real-estate dependent economy, when something in the housing sector begins to give in California, it's going to get real ugly real fast.