“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: A mind-numbing 1.5 million Californians have filed for unemployment benefits since mid-March as coronavirus protection measures, including strict limits on home selling, put a stranglehold on the state’s economy.

Source: Gov. Gavin Newsom

The Trend

Various “stay at home” orders, limiting work to a modest list of “essential” industries, have shut much of California. This immediate impact of 1.5 million job losses boggles the mind.

Basically, those layoffs equal to 1-in-12 California workers. Or almost half of the 3.4 million California jobs created since the Great Recession.

This flock of suddenly out-of-work people is nearly double the 840,000 people officially unemployed statewide in February when the jobless rate was near a record low of 4.3%. Assuming these new benefits claimants all become part of the jobless count, not to mention more who will lose the jobs, California’s unemployment rate could soon top the 12% peak of the Great Recession.

The Dissection

Real estate is about three simple words: Jobs! Jobs! Jobs!

The spring selling season once looked promising. Unemployment ran at all-time lows. Mortgage rates were also rock bottom. Sellers seemed serious about selling. And house hunters seemed hungry, especially since price gains were modest. By a federal home price index, appreciation ran 3.5% a year statewide as 2020 started.

Then came a global pandemic with few economic precedents.

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My trusty spreadsheet, filled with California unemployment figures and a federal home-price index for the state, showed me how truly unique this job market reversal is.

Since 1976, the most the state’s jobless rate ever jumped in one quarter was 1.4 percentage points. Over a half year, the biggest upswing was 2.5 percentage points. Both of these jobless spikes came amid the financial meltdown of 2008-09 that created the Great Recession.

So we’re really in unchartered waters. And historically speaking, large upswings in California unemployment has put home prices under pressure.

Over the past 44 years, when the jobless rate grew by a half-point or more in one quarter (yes, that seems tiny), 79% of the time the home appreciation rate cooled. In the biggest jobless jumps over two quarters (a full point or more), home gains cooled 80% of the time.

Big jumps in California joblessness have taken more time.

Think of the early 1980s economic slump, a byproduct of high-interest rates and an oil shortage. Unemployment peaked at 10.9% in 1982, after 13 quarters of increases that upped the rate by 4.7 percentage points. In that span, statewide home gains evaporated.

In late 1979, California appreciation ran at an 18% annual rate. At unemployment’s peak three years later, prices were declining by 1% a year.

When the 1980s’ economic rebound ended with a thud, and the aerospace industry collapsed, it took 16 quarters for California unemployment to rise to 1992’s peak. A 4.7 percentage-point increase pushed joblessness to 9.8%. In these four years, homes went from appreciating at 20% a year to depreciating 3% annually.

Or ponder the Great Recession. A 17-quarter firing spree pushed joblessness up by 7.4 points to 12.3%. In that timeframe, home values plummeted 37%.

Another view

A bit of good news: California homeowners appeared to have significant financial cushion “BC” (before coronavirus) in terms of equity in their home.

According to Attom Data Solutions, in 2019’s fourth quarter, only 2% of mortgaged homes statewide were deemed “seriously underwater” — that’s with mortgage 125% or greater of the homes’ value. California ranked third-lowest among the states.

And of the 107 large metropolitan areas studied, California had four among the 10 lowest: San Jose-Santa Clara, No. 1; San Francisco, No. 2; Los Angeles-Orange County, No.6; and San Diego, No. 10.

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FIVE BUBBLES!

Let me repeat: Jobs! Jobs! Jobs!

Folks without jobs don’t care how low mortgages rates are. Or how wide the gap between housing supply or demand is. Or where are the hottest new homes. They’re too damn busy scrimping to pay bills and scrambling to find income. Such folks won’t be house hunting, for sure, and they might even be “motivated sellers” soon.