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Thursday, July 20, 2006

Husing: Soft Landing for Inland Empire Housing

by Calculated Risk on 7/20/2006 07:48:00 PM

Private economist Dr. John Husing is quoted in the San Bernardino Sun: Husing still optimistic

There's just too strong an economy and too much job growth for much other than the "soft landing'' Husing and other economists have been predicting for the end of the five-year housing boom.

"We are right on the cusp of a very powerful period in job growth,'' Husing said. "Local [Inland Empire, San Bernardino/Riverside area] unemployment in May was 4.2 percent, and that's the lowest I have seen for May in 42 years of studying the local economy.
Senior economist Christopher Thornberg of UCLA's Anderson School of Management had called the soft-landing theory "nonsense'' on Tuesday and said we are in a "classic bubble.''

"If we are lucky, prices will go flat,'' he said, suggesting that we could see five years without price appreciation.

That may be true elsewhere, Husing said, but it won't happen here.

"Is the housing market vulnerable?'' he asked. "Yes, it is. But is a bubble likely to happen? No, it is not. The underlying strength of our economy is too great.''

Click on graph for larger image.

I disagree with Dr. Husing. I think the Inland Empire is one of the most vulnerable areas to a housing slowdown. Construction is far more important to the San Bernardino/Riverside economy than most other areas of the state.

As the homebuilders start to layoff workers, a larger percentage of workers in the San Bernardino and Riverside area are at risk. During the previous housing bust, the Inland Empire unemployment rate rose from 4.9% to over 12% (NSA) in just three years.

With regards to timing, I noted earlier:
Historically Construction Employment continued to rise for a year or more after the peak in housing transactions.
So I expect construction employment in the Inland Empire to start to fall during the next couple of quarters.

UPDATE: DoD Employment as Percent of Nonfarm Employment.

A common question is: how much did the aerospace / DoD spending slowdown in the early '90s impact employment? Although I don't have aerospace data (I'll look), this graph shows DoD employment was far more important for San Diego than the Inland Empire.

DoD and aerospace were probably most important for LA and San Diego in the '90s

Note that DoD employment was far less than construction employment. Also, DoD employment only fell slightly faster than total employment in the early '90s. Construction employment fell sharply. DoD employment was fairly flat during the mid-90s, so the percentage of total employment continued to fall as the California economy added jobs.

Although the aerospace slowdown probably precipitated the general economic slowdown in California during the early '90s, the housing slowdown had a larger impact. This time, many of us are suggesting that the housing slowdown will most likely be the precipitating event.