Some will see opportunity in this disaster

When drought, overdraft and the demographic and economic decline of the state's population are added up, it wouldn't seem like the ideal time to jump start the California economy with another building boom.
But "economic growth" in California has meant, for as long as people have been obsessed with the term, construction of more housing and commercial space. Although construction has still not regained its golden moment of totally reckless frenzy, we can be certain that the allure of rock-bottom lumber prices will raise the animal spirits of our speculative Interests -- finance, insurance and real estate. Note how the good economics professor and the real estate industry are at one in their moral enthusiasm for growth, that "virtuous cycle" that may only be interrupted by the death of the planet. 
Note also that some of the articles below contain extensive charts, for those readers more at home with blueprints than words. -- blj

“There’s so much supply that it’s outstripping demand," says Anderson. "The mills are full of logs because of all the fires and bug kill, and some mills won’t take any more trees at all period.” -- Amy Quinton, Capital Public Radio, Sept. 1, 2015

Drought and Beetle Infestation Killing California Forests
Amy Quinton / Capital Public Radio
Aerial surveys around the state show more than 20 million dead trees so far this year. The drought has a partner in crime – the pine beetle. If this deadly combination continues it could drastically change California’s forested landscape.  
To understand the impact of the drought in the Sierra Nevada forests, one need only visit Al Anderson’s 800-acre ranch in Mariposa County.
Loggers are busy cutting down dead trees on his property. Anderson says over the last two years, he’s watched his trees die.
“We took out more than 40 loads in April and May and we thought we pretty much had it," says Anderson. "Then, the day after the loggers left, we noticed more trees were dying.”
Trees are falling victim to three things right now; drought, the pine beetle, and wildfires. 
Each of these stressors on its own is bad enough but together they feed on each other.  That’s accelerating the pace of the die-off. 
Robert Giorgi has been helping Anderson cut down the trees. He holds up a stump he cut just a few hours earlier.
“The very center of the trees are just dry, almost hollow sounding to hit, no water, they can’t fight them off,” says Giorgi.
It doesn’t help that Anderson’s property is next to the Sierra National Forest. Dead trees from a wildfire two years ago are attracting the bugs and they’re spreading onto Anderson’s property. 
Anderson stands on a ridge overlooking a valley with huge swaths of dead brown trees.
“This entire ridge up here, the part that wasn’t burnt, the bugs got the rest of it,” says Anderson.
Aerial surveys by the Forest Service show more than 18 million dead trees in the Sierra forests. But there are millions more around the state. 
“Mortality in our state’s forests is as bad as we’ve seen in any recent history, going back decades at least, if not recorded history.” says Matt Dias, acting executive officer with the California Board of Forestry and Fire Protection.
Dias says the board recently took the unprecedented step of relaxing rules that limit the amount of trees a landowner can remove – because all the dead trees increase the wildfire risk.  
What to do with all the dead trees is another problem. Al Anderson says saw mills are backlogged.
“There’s so much supply that it’s outstripping demand," says Anderson. "The mills are full of logs because of all the fires and bug kill, and some mills won’t take any more trees at all period.”
For now, the dead trees sit in his yard wrapped in plastic until he can get a saw mill to take them.
The dead trees aren’t just a burden for landowners.
About four hours north of Anderson’s property, PG&E crews are cutting down four dead Ponderosa pine trees that threaten to take down power lines.  
“Three months ago we were out here and these trees were not dead and now they are," says Jeff Mussel, vegetation program manager for PG&E.  "So the amount of time that’s it’s taken for the trees to go from a healthy green appearance to ultimately dead is extremely rapid,” he says.
Mussell says watching the hillsides turn brown is devastating to witness. 
Bridget Fithian with the Sierra Foothill Conservancy agrees. She says if this continues there will be no conifers left.
“It’s really, it’s like a freight train basically moving through the whole Sierra and in our lifetime we’re probably going to see a dramatic conversion of this landscape.”
Fithian says the Sierra could be transformed into a landscape that mirrors Southern California. All Al Anderson can do is watch.
“Emotionally it’s pretty difficult. This was my pride and joy. And to sit here and watch it get destroyed by a little bug is hard to take,” says Anderson.

New Geography
Bill Watkins
California’s political class, led by Governor Brown, has been patting itself on the back for solving California’s problems. This celebration is ludicrous.  What they’ve done amounts to a mere slowing down in a long-term political, fiscal, and demographic decline. 
Demographic trends themselves are creating a crisis brought about by a population that is simultaneously losing its children and getting older, and to a frightening extent poorer. From 2000 to 2010, the percentage of Los Angeles' population under 15 years old fell by 15.6 percent. This was the greatest decline of any U.S. major metropolitan area, and about double the U.S. average of 7.4 percent.
California's poverty statistics are just as depressing.  The state now is home to one-third of all US welfare recipients. According to a Census Bureau report, The Research SUPPLEMENTAL POVERTY REPORT: 2011 California has the nation's highest poverty rate of any state. By its Supplemental Poverty Measure, 23.5 percent of California's population is poor, while only 15.8 percent of the nation's population is poor.  No other state is above 20 percent.
Because of its aging and increasingly poor population, its dearth of young people and migratory trends, demand for government services in California will be increasing as the number of people available to pay for those services will be decreasing.  Financing concurrent expenses will be hard enough.  Paying for today’s excesses may prove impossible.
Let’s go through the evidence:
Figure 1 shows California’s Department of Finance’s (DOF) estimate of domestic migration, migration between California and other states.  According to the DOF, California’s domestic migration has been negative in 18 of the past 20 years.  This is less dismal than the U.S. Census’ estimate that California’s domestic migration has been negative for 20 consecutive years.  This is the longest sustained period of negative domestic migration in California’s history.  We've seen this before, in the rust belt.  It leads to decay, poverty, increased crime, and unlivable cities.
Domestic migration is important because it should be seen as an early warning signal of eventual decline.  Migrants are the proverbial “canaries in the coal mine”.  When domestic migration is negative, people are voting with their feet.  They are saying that California doesn’t provide enough opportunity to stay, particularly given its high cost of living.  Given how comfortable it is to live in California, I think they make that decision reluctantly.
Over most of California’s recent history, international migration has been strong enough that total migration remained positive.  That’s no longer true.
Figure 2 shows California’s total net migration for the past 107 years.  Prior to 1993, California had never seen a year where total migration was negative.  Now, we’ve have negative migration for eight consecutive years.
More critically, the rate of foreign migration in the state’s cities is falling behind many competitor cities. For example, over the last decade, New York had almost six times the increase in foreign born than Los Angeles. Houston, which has barely one third the population of LA-Orange County, increased its foreign born nearly four times as fast. Overall, LA-Orange had the lowest percentage increase of any major US metro. Given that the Southland has been the state’s immigration magnet for a generation, this is not good news.
Weak, negative migration is likely to continue.  We used to characterize domestic migration as pull migration; rapidly growing economies attract migrants looking for opportunity. International migration, especially from other countries in this hemisphere, was thought to be push migration; conditions were so bad in the country of origin that migrants would come to California even in a recession.
Apparently, that’s no longer true.  Mexico, for example, has an unemployment rate of about half of California’s today.  When you add the increased cost imposed by coyotes on illegal immigrants (a price increase from about $3,000 a few years ago to about $6,000 today plus the requirement to carry drugs), it’s no mystery why California’s growers are having a hard time finding an adequate workforce.
Negative migration is important because migrants have been a critical part of California’s growth and creativity.  Not only is California losing the services of the migrants who choose, say, Texas instead of California, California is suffering a drain of some of its talent pool, particularly among those about to have children.
For a long time, many people thought that California’s Hispanic population would cause its population growth rate to increase.  That turns out to not be true.
Figure 3 shows California’s birthrate.  Our births per thousand population is the lowest it’s been since the worst part of the depression.  What’s scary though, is the rate of decline.  Births have fallen below 15 per thousand and seem destined to hit 10 per thousand.  This is a national trend and a key reason to create national policies that encourage increased international immigration.
If a population is growing, it’s possible to have increasing births (new people) even when the birth rate is declining. Unfortunately, California isn’t there.
Figure 4 shows the total number of births in California.  It’s fallen to 500,000 per year from 600,000 per year about 20 years ago.  If California’s birth rate falls to 10 percent, we can expect the number of births to decline to about 350,000.  At that point, the math starts to get to be a problem.  Is a decline to 10 per thousand possible?  You bet.
According to the CIA, as of 2012, 29 out of 221 countries (13 percent) had birth rates below 10 per thousand.  Those 29 countries included Japan, Germany, Switzerland, South Korea, and Singapore.
Unfortunately, California --- as opposed to states such as Texas --- could reach a 10 per thousand birth rate within 10 years if existing birth rate trends continue.  Even more disturbing, there is no reason to believe that 10 per thousand is a lower bound.  Germany, for example, has a birth rate of 8.33, while Hong Kong and Singapore have rates of only 7.54 and 7.72 respectively.
For California’s population to continue to grow, births have to outnumber the losses to migration and deaths.  We’ve already discussed migration.  What about deaths?
Figure 5 shows annual California deaths from 1971 through 2012.  While recently flat, the trend is up, and an aging population implies more increases. For our calculations, we’ll assume California deaths at 250,000 per year.  This is a conservative assumption. As the Baby Boomers age, California deaths will increase.
When California’s birth rate falls to 10 per thousand, we can expect 350,000 births.  Deaths will be about 250,000. Apparently, as long as outmigration doesn’t exceed 100,000 California’s population won’t decline overall.
The good news is that outmigration in excess of 100,000 has only happened once.  California's net outmigration exceeded 100,000 for two consecutive years in the 1990s, when California was undergoing a dramatic economic realignment brought about by the end of the Cold War. 
The bad news is that we’ve come very close to losing 100,000 twice in the past eight years, particularly during the housing boom. Many people believe that low home prices are restraining domestic outmigration, because people are waiting for equity to return before making the move. Higher home prices and increased tax rates could drive big increases in the numbers of people leaving California.
Unless there is some dramatic change, it is almost inevitable that California will suffer a declining population within a generation. The way to avoid this calamity is create an economic environment that encourages job growth and economic activity. 
At the same time, it appears prudent to begin planning now for an aging and possibly smaller population.  Increased government revenues through more robust and varied economic activity would help here, but more probably needs to be done. California needs to reform its business climate, reduce its debt and unfunded liabilities, and do so quickly.
Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at
Firsttuesday Journal
The rising trend in California construction starts
August 31, 2015
Single family residential (SFR) starts in the six-month phase ending July 2015 rose 21% over one year earlier. Likewise, multi-family construction rose 26% over the past year. This reflects a higher demand for multi-family rentals compared to new SFRs. Buyer-occupant demand for homes is weaker, primarily due to high home prices. The result is continued flat sales volume and mortgage originations.
38,600 SFR starts took place in 2014, up a meager 4% from 2013. Expect construction of new SFRs to rise just slightly 2015, perhaps about 10% higher than 2014 by year’s end. Homeowner vacancies are currently level with their historical average, thus SFR construction will have to increase to meet any future rise in demand. However, this demand won’t be realized until more homebuyers return to the market, peaking in 2019-2020.
There were 44,300 multi-family starts in 2014, roughly level with the prior year. Multi-family starts fell in the first part of the year but picked up steam by the end of 2014. Today’s increase in multi-family starts is being driven by a demand shift from ownership to rentals. Multi-family starts are expected to increase at an annual pace of roughly 20% in 2015, driven by a demand shift from ownership to rentals.



This chart illustrates the number of California residential construction starts during bi-annual  periods ending in July and January.






Detached single family residential construction trends in California:


·         24,200  SFR starts took place in the six-month period ending July 2015. This is up 21% from the same period one year earlier, amounting to an increase of 4,200 starts.

·         38,600 SFR starts took place in 2014. This is up only 4% from 2013.
·         The trend in the total number of SFR starts in 2015 is expected to be a slight rise about 10%.
·         For perspective, this cycle’s peak year in SFR starts was 2005 with 155,000 starts. The lowest year was 2009 with 25,000 starts.
·         Final reports issued for new subdivisions by the California Bureau of Real Estate (CalBRE) have remained constant for several years, roughly level during the past 12 months.
Detached SFR forecast:
·         first tuesday‘s forecast for total SFR starts in 2015 is 42,500. This is 10% higher than 2014.
·         SFR starts will begin to rise more noticeably in 2016.
·         Subdivision final reports will continue strong as developers continue to sense a return of home buyers is on the horizon.
·         The next peak in SFR starts will likely occur during the boomlet period of 2019-2020.
Multi-family housing construction trends:
·         28,500 multi-family housing starts took place in the six-month period ending June 2015. This is a 26% rise from the same period one year earlier and the trend points to a sustained increase. This amounts to an increase of 5,900 starts over the six-month period ending one year earlier.
·         44,300 multi-family housing starts took place in 2014. This was up very slightly from 2013.
·         For perspective, this cycle’s peak year in multi-family housing starts was 2004 with 61,500 starts. The lowest year was 2009 with 11,000 multi-family housing starts.
Multi-family housing forecast:
·         first tuesday‘s forecast for total multi-family housing starts in 2015 is 53,200. This is a 20% increase from 2014.
·         Multi-family housing starts will continue increasing at an annual pace of roughly 20% throughout 2015 and into 2016.
·         The next peak year for multi-family housing starts is likely to be 2019.
Statistics related to California housing:
·         6,805,000 owner-occupied housing units existed in California in 2013, according to the U.S. Census Bureau. This is an increase of 3% over the prior year.
·         California population growth is increasing at a rate of just below 1% per year, having bottomed at the height of the Millennium Boom and trending upward slightly since then.
·         16,022,600 people were employed in California in July 2015. This is 425,500 jobs above the pre-recession peak month of December 2007, according to theCalifornia Employment Development Department (EDD), yet to catch up with the 1.2 million increase in working-aged population.
·         The trough month for employment was January 2010, with 13,686,400 people employed state-wide.
·         The rental vacancy rate in mid-2014 was 5.2%.
Construction starts will continue to rise through 2019, at least. The pace of this rise is dependent on several factors, discussed below.



Key factors for builders
How do builders decide when and where to build? Builders analyze existing home sales, end user demand and local employment. Together, an analysis of these and ancillary factors produces a prediction of future construction trends.
End user demand drives sales
Homebuyer-occupant demand will ultimately determine whether and how fast construction starts for SFRs and condos will continue to climb. Currently, speculator acquisitions at around 23% of home sales continues to influence California’s existing home sales volume. This intervention progressively subsided in 2014.However, builders rely upon buyer-occupants to support new home construction, culling out speculators as buyers. Buyer-occupant demand to purchase a home remains weak as we head into 2015, primarily due to high home prices. This is demonstrated by the continuing flat sales volume and mortgage origination figures. Builders will continue to bide their time until sales volume figures for buyer-occupants pick up.
Employment drives demand
When speculators interfere, home sales display a distorted picture of demand. However, builders need to look to jobs data as the primary impetus for demand when they set the level of starts that will likely sell. California finally recovered all jobs lost during the 2008 recession in mid-2014.  Still, considering the intervening population gain, full employment and labor force participation comparable to December 2007 peak is expected around 2019.
Obstacles facing SFR builders
Obstacles of concern to future construction starts include:
·         Speculators and syndicators dumping the fast building shadow inventory of their circa-2012-2014 acquisitions back on the market;
·         Slipping rent rates in the suburbs due to competition by absentee owners for SFR tenants;
·         Rising mortgage rates, reducing homebuyer funding before completion;
·         Leased urban condo projects built but yet-to-be-sold due to the recession;
·         An upturn in foreclosures/REO resales and bankruptcies likely to re-occur after mortgage rates begin a sustained rise, likely in 2015; and
·         California’s 632,000 negative equity (underwater) homes, as of Q4 2014, inhibiting turnover.
Until these factors are considered, builders can’t take for granted that construction starts will pay off. Expect starts to only modestly increase until these factors collectively improve, around 2017.



Firsttuesday Journal
Nobody’s home: California residential vacancy rates
February 11, 2015
Both rental and homeowner vacancies were low in 2014. The rental vacancy rate declined to 5%, falling to its lowest level since 2006. This is below the historical equilibrium rate of 5.5%.The homeowner vacancy rate remained level in 2014, around the historical average of 1.2%.
Residential vacancies have decreased as California’s economy produces more jobs, allowing more household formations to occur. However, construction starts need to rise to offset the decline in vacant rental units, otherwise the price of rents will rise for failure to break ground. This has already occurred in city centers like Los Angeles and San Francisco, where residential rents are well above average.
The postman’s beat is getting back to normal
Residential vacancies continue to decrease as the effects of the 2008 recessionslowly diminish. At the height of the recession, dead lawns and the constant presence of “For Sale” signs stood out as vividly as missing front teeth do on the face of a smiling child.
These vacancies blighted neighborhoods and provoked crime, destroying the wealth of neighboring homeowners. Heavy residential vacancies are an indicator of an improperly functioning local economy — one in which real estate is held hostage by a lack of liquidity (read: cash) and a lack of users.
A look at trends driving vacancies during the past recession and recovery cycle provide a glimpse into what vacancies can tell us about the direction of the current recovery.
Trends in residential vacancies
Residential vacancies are broken down into two categories by the U.S. Census Bureau:
·         homeowner vacancies; and
·         rental property vacancies.
Homeowner vacancies represent the number of vacant units present in the total homeownership housing segment of California residential housing. Homeowner housing units consist of residential properties which are:
·         owner-occupied;
·         sold to a homebuyer and awaiting occupancy (from both builders and multiple listing service (MLS) inventories); or
·         unsold and vacant housing inventory not for lease.
The vacancy rate to which homeownership vacancies consistently return in California is roughly 1.2%. As the economy strengthens and then weakens, through population growth then housing starts, actual vacancies will run below the equilibrium (as in 2005) and above it (as in 2010).  Presently, homeownership vacancies — comprising primarily homes for sale — are resting at the normal vacancy rate.
Likewise, rental property vacancies represent the number of vacant units within California’s rental housing segment. The rental housing segment consists of properties which are:
·         renter-occupied;
·         rented and awaiting occupancy; or
·         unrented and vacant and held out for sale-or-lease, or just for lease.
The vacancy rate to which residential rental properties return in California is roughly 5.5%, a pivotal figure for property managers and investors. Homeowners are less likely and, in many recessionary real estate markets, simply unable to sell, pack up and move, tethered to their homes by property price corrections, negative equity and a dearth of users as buyer-occupants.
Like homeownership vacancies, the rental vacancy rate varies above and below this pivotal mean figure depending on conditions of a full recovery or a recession. Presently, the rental vacancy rate is below normal. This decreased rate was once due to higher than normal homeowner vacancy rates — those who either lost their homes or decided to put off homeownership after the Great Recession but still needed a place to live and have filled up rental properties. Now, the low rental vacancy rate is partly attributed to the slowly recovering construction industry, which while growing, has failed to keep up with rising demand for rentals. This isn’t builders’ fault either. Strict zoning regulations in desirable areas limit new multi-family housing.
The relationship between homeowner and rental vacancies is one of undulating equilibrium. When home prices are high and it makes more financial sense to rent, vacancies in rental housing go down and homeowner vacancies go up. Other factors can influence this equation, like the massive foreclosure and short sale crisis that has just recently begun to subside. Over time, the dominance of one type of housing (homeowner vs. rental) is equalized by a shift in favor of the other type of housing, a fact borne out by simple arithmetic.
For instance, as more and more individuals continue to favor rental housing, the demand for rental housing causes landlords to increase rents to maximize profits. This, in turn, eventually translates into more lucrative conditions for homeownership, as well as construction opportunities for builders and investors.
However, builders took advantage of the lush lending conditions of the early and mid-2000s. As a result, they introduced massive inventories of SFR housing units into the market with relatively little durable demand by end users.  By the mid-2000s, the historical trends pulling on both types of vacancies were jolted loose by rapacious mortgage money management and vacancies became unanchored, to soar as they did.
Easy lending fueled the building rampage


Chart update 02/11/15


The introduction of new housing units into the homeowner/rental vacancy equilibrium is not in and of itself a disruptive event. This is simply because the California population grows (consistently around 1% annually since 2001, and at the moment primarily comprised of net births over deaths). However, the sheer volume of SFR construction introduced into the housing-saturated Millennium Boom real estate market was not only disruptive, but disastrous.



A brief history lesson will demonstrate how builders got carried away. In the early 2000s, just as the economy was beginning to slip into a corrective recession, theFederal Reserve (the Fed) stepped on interest rates to stimulate growth in hasty reaction to perceived business recession due to the September 11, 2001 terrorist activities. The Fed change in monetary policy did not allow the ongoing 2001 recession to complete its work to cool down excessive real estate prices brought on by the recovery in 1998.


These low interest rates encouraged lenders to lend — which they did in spades through Wall Street bond market funding. The Fed later took no steps to withdraw the excess funds they had prematurely pumped into the banking system after September 11, 2001. The money flowed like wine, luring all manner of borrowers to gulp from the proffered cup. Among those who drank most deeply were builders.They borrowed and built since money was available from local bankers to do so. For, contrary to popular belief, builders do not build in anticipation of current or future housing demand. Rather, they build because there is money available for them to do so.

Editor’s note — Observe that even as the rental vacancy rate (the purple line) rose, builders did not cease their building of multi-family apartment buildings (the red line). The expense and scope of building multi-family units kept that boom from reaching the proportion of the single family residence (SFR) building spree, but it nonetheless illustrates the unrealistic doggedness of builders with money.
When the Millennium Boom began in earnest in 2002, more people began to jump on the homebuying bandwagon. Naturally, rental vacancies began to rise. However, the homeowner vacancy rate (the teal line) began to rise uncharacteristically with rental vacancies, even during 2004-2006 when buyers (users, buy-to-let investors and speculators) were all pouring into the market at the same time. The concurrent increase in construction of residential units kicked homeowner vacancies to upwards of an unprecedented 3% level by 2008.
In contrast, the recent previous peak in building permits (the orange line) during the late ‘80s was met with a relatively modest, but extended period with a homeownership vacancy rate of 2%. The overbuilding during the late ‘80s was fended off, then and into the early ‘90s, with a weapon the current real estate market continues to lack: household formations.
The demographic shift creates an inventory issue
As observed in the vacancy and construction chart, the actual peaks of both SFR and multi-family housing unit starts came in the late ‘80s. Fortuitously, the blind overbuilding of that decade came at the same time the Baby Boomers were forming families and moving into rental housing or buying homes. The massive Boomer generation thus relieved the market of much of its excess inventory in the period immediately following the 1990 recession.
With the latest building spate, which began in 1996, the builders charged full-steam ahead — and built housing for a declining market. The Boomers had already settled into their properties and the generation immediately following them (Generation X)was far less populous and more transient, leaving a glut of housing units on the market vacant.
In an attempt to drum up household formations (and at the expense of more vacant rental housing), the federal government began a campaign to push the homeownership rate above its traditional 64% national threshold. Part of this campaign came in the form of allowing seller concessions on mortgage loans – nodown payment or funds for closing costs needed – now a highly-regulated and mostly prohibited practice. The efficacy of the government’s push for homeownership can be seen in the change in California’s homeownership rate (which is historically much lower than the rest of the nation) from around 54% in 1990 to nearly 61% at its peak in 2006. Nationally, the respective percentages were 64% and 69%. Government housing policy was now working overtime



Unfortunately, just like housing construction, the government’s push for homeownership was running on empty: Generation X simply did not have the population to keep the construction engine running. Thus, the SFR construction boom of 2000-2005 was driven by the availability of money, not demographics, let alone user demand. Many of the homeowners lured out of the woodwork to push that homeownership ratio were those who were, by real estate fundamentals, incapable of sustaining long-term ownership — as evidenced by the increase in the ratio of (unstable) adjustable rate mortgages (ARMs) to traditional fixed-rate mortgages (FRMs), and the rise of the now-infamous subprime mortgage.



These temporary homeowners served to keep the homeowner vacancy rate down through the mid-2000s — the rental vacancy rate at the time was trending steadily upwards, since tenants of all types were vacating their rented premises to move into homes — all with government encouragement. In 2006, homeowner and rental vacancies began to rise again — in part because of the lack of homebuyers in the market, and in part because of the rise of the buy-to-let investor and thespeculator.

Speculators and investors take their piece
Speculators exited the market throughout 2014 after a year and a half of purchasing huge amounts of real estate in the hopes of selling it on a flip and making money on market momentum as prices are driven ever upwards by frenzied buyers. This can increase the homeowner vacancy rate, as they purchase properties from owner-occupant sellers and place the properties back on the market for resale – the flip.
Buy-to-let investors purchase property with the intention of renting it out for the long-term. On a more limited scale, they also fell victim to the housing frenzy of the mid-2000s and purchased property away from owners (and to a lesser degree, speculators) to add to the number of rental housing units.  Eventually, as the Boom wound down and prices began to drop, speculators were left with homeownership properties they could not sell at a profit. Slowly the speculators’ “For Sale” signs became “For Rent” signs. The then-burgeoning crisis placed both speculators and buy-to-let investors in the unenviable position of inefficient landlords: unable, as individuals, to find tenants as quickly or with the (relative) ease of larger apartment complexes. Thus, rental vacancies grew.
The warning bells beginning in 2005-2006 (sales volume peaked in August 2005 and sales prices peaked in January 2006) tolled the coming of the 2008 recession, as many of the threads holding the real estate market together began to unravel. The other factor driving vacancies emerged like an angry bull after a red flag:foreclosures.
The effect of NODs on vacancies
During the Boom, buyers of real estate (and their brokers and agents) completely lost track of the fundamentals behind the decision to buy a home versus rent it. The simple cost/benefit analysis multiplier which determines whether it makes financial sense for a tenant to become a buyer, also known as the gross revenue multiplier (GRM), went through the roof.
This impracticality came home to roost when the ARMs began resetting and homebuyers suddenly realized they could not pay more than the initial teaser rate payment on their mortgages, an amount roughly equivalent to rent. By December 2007, the recession had officially set in, brought on by Fed action to bring about a regular business recession (a precursor to lost jobs, which were yet to come) and an unanticipated number of mortgage delinquencies.
In California, recording a notice of default (NOD) is the first step in the foreclosure process. The process ends when the property is sold at a trustee’s sale.  In some cases, these trustee’s sales result in the property being sold back to the lender and then resold as real estate owned (REO) property, to remain vacant for months. However, in 2013, speculators bought up homes at foreclosure sales, reducing the number of vacancies – particularly homeowner vacancies



These REOs are considered homeowner vacancies while they are on the market for sale. The disposition of REO properties on resale goes both ways:



·         to owner occupants who will decrease the homeowner vacancy rate; and

·         to buy-to-let investors or speculators who will both end up attempting to rent them, and whose inefficient attempts to do so will result in an increase in the rental vacancy rate (and lowering of rents).
From 2008 to 2009, the sheer number of NODs and subsequent foreclosure sales eventually drove real estate prices back to their 1999 pre-Boom levels (and below inflation adjusted levels for 2001), creating a pocket of relatively cheap real estate prices, particularly in low-tier properties. High-tier property owners were better able to carry the mortgage payments on their devalued properties, which they could not sell for lack of mortgage lending (jumbo mortgages). But by 2010, defaults, foreclosures and resales at much lower prices began to appear in these wealthy neighborhoods with a vengeance.
The shock of the housing crash and the flood of vacant inventory prompted both state and federal governments to attempt to stimulate tenants into becoming homebuyers by using tax subsidies to supplement their down payments. Thus, homeowner vacancies broke the upward trend in 2009 and briefly decreased. This reversal did not persist beyond the end of the subsidies in 2010. Today, NODs and foreclosures are at roughly normal levels. However, they are likely to rise slightly in 2015, as home sales and prices flatten due to a reduced speculator presence and rising interest rates.
Jobs move real estate
In the recovery period following the 1990-1991 recession, jobs increased as both rental and homeowner vacancies decreased. This makes sense: when people have jobs, they are able to form households by moving out on their own to occupy housing.
The opposite occurred during the Millennium Boom. Vacancies rose in both homeownership and rental segments, sure signs the real estate market was over-saturated with property and thus could not sustain its breakneck pace forever, climbing steadily even as the number of jobs increased.
Why? The economy, spurred by the false success of the housing market, over-hired. With scads of money being thrown at housing during the Millennium Boom, the number of jobs in construction, real estate and real-estate related financial services (lenders, mortgage brokers, insurers, sales agents, etc.), skyrocketed. The money being earned by these industries seeped into other industries through consumerism, fueling more jobs growth in other economic sectors, and more construction, and so on — the virtuous cycle,



When the recession hit in 2007 and false expectations of perpetual growth were dashed, the number of jobs plummeted, rippling from the real estate market on outwards. As jobs return in sufficient numbers (at least 350,000 annually for 18-24 months) likely beginning in 2014, individuals will begin to cultivate the economic and social confidence needed to form households and bring vacancy rates back to normal.



These future users of real estate will arrive in the form of the Baby Boomers’ children — Generation Y (Gen Y) — peaking in numbers around 2019-2020. Their function as the impetus behind the housing recovery will be, as always, contingent on the creation of jobs supporting their household formation.

Without jobs befitting their college educations, members of Gen Y will be unable to leave their parental nests and move out on their own. They are shadow households — the users for the real estate which will, even after they come of age, need financial stability in the form of jobs before they can proceed to claim their households, and in the process reduce all types of residential vacancies.
When they do succeed in finding jobs that will support households, most all of them will initially rent until they have settled into their jobs and communities. In a few years, after they have built up sufficient credit and wealth to qualify to purchase a home, many will do so and drive down the homeowner vacancy rate. Thus, similar to the injection of housing units which created the current distressed real estate market, the injection of Gen-Y households will serve to balance and return equilibrium to residential vacancies.
Agents and brokers, looking forward
Today, we see the rental market recovering first since new households and new job holders typically rent prior to entering homeownership. Also, look for a shift in the equilibrium of vacancies in rentals vs. homeowner housing units — most of those whose credit was burned by this latest real estate recession will not return to homeownership once the dust has settled.
Brokers and agents can keep an eye on vacancy rates in certain niches of the market — cities, as centers of culture, commerce and government, will work through their inventory more quickly than will their suburban bedroom community counterparts. Watch for rentals in urban markets to pick up first and direct employment and investment efforts in that direction to reap profits in the future.