SAN FERNANDO VALLEY 2008 3rd QTR ECONOMIC UPDATE
San Fernando Valley Economic Research Center
CALIFORNIA STATE UNIVERSITY, NORTHRIDGE
Dr. Daniel Blake, Director 818-677-7021
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Unemployment Insurance Claims: Valley Quarterly Unemployment Insurance (UI) claims shot up to a 5-year high in the 3rd quarter as recession gripped the California economy. The Valley’s 3rd Quarter’s 27,451 UI claims soared 77.3% above 3rd quarter 2007 claims and topped every quarter’s claims since the 3rd Quarter 2003. There were only three other quarters during the 2001 recession and its aftermath that topped third quarter’s Valley UI claims. Third quarter UI Claims rose a similar amount for both LA County and California. The outlook for unemployment and UI claims in the Valley, LA County, and California is for these indicators to continue to rise for a period of time. Unemployment, being a lagging indicator, often continues to rise during the early months of the recovery.
Housing Markets: Affordability will continue to improve as the median home price shaves off a few more dollars in the near term and mortgage rates move to somewhat lower levels. Expect home prices to stabilize in the not-too-distant future and mortgage markets to resume near full functionality, albeit with raised credit and income requirements for would-be buyers. Notice of Default and Foreclosure rates will remain elevated but will move off their recent peak levels in 2009 as new policies and mortgage market institutions work to resolve the mortgage market crisis.
Unemployment Insurance claims soared in the Valley and elsewhere in California as the economic recession took hold in the 3rd quarter.
Valley Quarterly Unemployment Insurance (UI) claims shot up to a 5-year high in the 3rd quarter as recession undoubtedly gripped the California economy. The Valley’s 3rd Quarter’s 27,451 UI claims soared 77.3% above 3rd quarter 2007 claims and topped every quarter’s claims since the 3rd Quarter 2003 27,716 UI claims—which occurred while the economy was recovering from the 2001 recession and the dot-com bust. There were only three other quarters during that recession that topped this quarter’s Valley UI claims.
To underscore the severity of the current Unemployment Claim levels in the Valley, each of the four quarters in the 2001 recession aftermath that topped this quarter’s UI claims included “extended Unemployment Insurance eligibility claims”. These “extended claims” result from the Congressional recognition of the 2001 recession under which they legislatively enabled the unemployed to claimbenefits beyond the normal 26-week limit. This adds the longer-term unemployed to the UI claims rolls and increases the number of UI claims. Subtracting the extended eligibility claims from those four quarters in the 2001 recession puts the maximum regular UI claims below 25,600 during that period. The current 27,451 quarterly UI claims, which do not include extended UI benefits, clearly exceed the levels of Valley UI claims during that period, and in any time since quarterly claim data for the Valley became available in 1995. (See the SFV Quarterly Unemployment Insurance Claims Chart.)
Typically, UI claims climb during the first two quarters of the year then falls back a bit in the third quarter, finishing the year with the lowest claims total in the fourth quarter. This is unlikely to be the pattern this year. The outlook for many businesses includes staffing cuts rather than additions at this time.
Economic Indicator: Airline Passenger Traffic and Air Cargo Volume
Both Passenger traffic and Cargo volume reflect the economic slowdown and Passenger traffic bore the brunt of the third quarter decrease while the Cargo volume slippage moderated at the Burbank facility.
Monthly and quarterly total passenger traffic (incoming and outgoing) at Bob Hope Airport fell relative to 2007. Septembertraffic dropped 16.5% and thirdquartertraffic fell by 14.8% from the same period in 2007. After growing 2.9% in the first quarter of 2008, second quarter traffic fell 7.8% relative to 2007, and continued to slide in the third quarter, dropping 14.8% below its 2007 level. This passenger traffic slowdown marked the first down quarter for passenger traffic at the Burbank facility since 9/11 and the 2001 recession and its aftermath. Burbank passenger traffic began its recovery in mid-2002 and grew at moderate to slow rates since then until the second quarter downturn.
Third quarter Burbank cargo shipments also fell 8% relative to 2007—a more moderate slide than the second quarter’s25.8% drop in volume 2007. Unlikepassenger traffic, the drop in cargo began in the fourth quarter of 2007 with an 18.5%decrease, followed by a 23.8% fall inthe first quarter and a 25.8% fall in the second quarter before the decline slowed to8.0% in the third quarter. September cargo even showed 6.8% increase relative to September 2007, but that increase resulted from an unusually low cargo volume in September 2007 rather than substantial growth in 2008 (see the Monthly Cargo Chart). While cargo volume through Burbank has been more volatile than passenger traffic, the last four quarters marked the first sustained and significant decline in cargo volume since the recovery from the 2001 recession.
Economic Indicator: Tourism
Strong seasonal influences can beseen in the month-to-month occupancy rates of Valley lodging establishments butlonger-term trends show up in the 12-month moving average of those rates. The accompanying SFV and LA County Hotel Occupancy Rates chart shows the long-term trends in occupancy rates in which Valley occupancy rates edged downward over the last two years while LA County occupancy rates held steady. The chart also shows the recovery in Valley occupancy rates following 9/11 and the 2001 recession, which continued until early 2006.
The real room rates (inflation-adjusted) for Valley lodging has remained fairly constant over the last two years, with the average varying between $130-140 per night when stated in 2008 dollars. This is an improvement from the roughly $120per night rate that prevailed in the2004-2006 period. On the other hand, the LA County per night rates maintained a roughly $140 average during most of the post-2002 recession period until early 2006 when they moved toward $160 per night and have edged upward since then. The higher occupancy rates in the County relative to the Valley may account for the differential trend in room rates, with the higher occupancy rate for the County allowing for the upward drift in real room rates. (Again, these are inflation-adjusted room rates stated in mid-2008 dollars.)
Economic Indicator: Bankruptcy
Bankruptcy data for the San Fernando Valley Court is prepared and reported annually. Please see our most recent SFV Annual Report for Valley bankruptcy data and analysis. 2008 SFV Economic Report
SAN FERNANDO VALLEY HOUSING REPORT for OCTOBER 2008
San Fernando Valley year-over-year home sales doubled in October—up 98.0% from October 2007. This doubling in year-over-year sales last month reflects two elements—1) last year’s low sales level due to the mortgage market meltdown and falling home prices, and 2) the steady upward march of home sales this year. In fact, October home sales rose 15.5% from September, making this month’s increase the second highest this year. The near-term home sales outlook will depend on the interplay of the positive effects of attempts to restart the mortgage market by Washington policy-makers and the dampening effects of the expected near-term job losses. (These data pertain to all resale homes and condominiums and were provided by DataQuick and pertain to the Valley, including Burbank, Glendale, and Calabasas.)
October 2008 September 2008 October 2007
SFV Home Sales 1,461 1,265 738
12 month change +98.0%
The Valley’s median price of a single-family, detached home halted its downward course, at least momentarily, by rising from $400,000 in September to $405,000 in October. Still, October’s $405,000 median price is 31.2% below October 2007. This does not mean that housing prices have bottomed out, but the increasing sales and slower price descent mean that Valley housing has become more affordable causing a number of previously sidelined buyers to buy. Once it becomes obvious that home prices have bottomed out, which could be several thousands if not tens of thousands below the current median price, more buyers will join in.
October 2008 September 2008 October 2007
SFV Median Price $405,000 $400,000 $589,000
12 month change -31.2%
Notices of Default (NODs) continued at depressed levels in October due to a new requirement that homeowners be given a 30-day notice before filing a Notice of Default. October NODs dropped to 588 from 977 last October (down 39.8%) but rose slightly from the 524 NODs in September, the first effective month of the new regulation. Whether NODs stay at lower levels for the near term or rise back toward the 1,500 range of summer months depends on both homeowners’ and lenders’ reactions to this new grace period, on lender’s holiday period policies, and on mortgage and credit market policies now being fashioned in Washington.
October 2008 September 2008 October 2007
SFV NODs 588 524 977
12 month change -39.8%
October foreclosures, at 549, are down 33.2% from the September level of 822, but are 32.6% above October 2007’s 302 foreclosures. This lower foreclosure rate, relative to the 850 per month average of the last four months, undoubtedly relieved some of the downward pressure on home prices in October. If Notices of Default and foreclosure rates remain relatively subdued and the Washington credit and mortgage market policies provide some relief and reduce uncertainty, home prices may stabilize and sales resume near normal levels in the near future.
SFV Foreclosures 549 822 414
12 month change +32.6%
LA County Foreclosures 2,459 3,644 1,660
12 month change +48.1%
Housing Market Inventories
Multiple Listing Service numbers provided by the SouthlandAssociation of Realtors indicate that inventories peaked in January 2008 at 16.2 months supply and fell sharply in subsequent months to stand at 6.0 months supply in October. Just as falling sales relative to a growing number of active listings produced the run up to the peak in inventory, rising home sales during 2008 relative to a dropping level of active listings has brought the inventory levels down sharply in 2008. Inventories are now at the top end of a “normal range” for the housing market. (Housing inventory is the ratio of activelistings to monthlysales, which shows the number ofmonths of sales at the current rate that would be required to exhaust the activelistings number, and thesenumbers pertain to the LAportion of theValley, San Fernando, andCalabasas.)
Recent turbulence in the financial markets has translated into gyrations in the mortgage rates. Conventional mortgage rates fell sharply in September, settling at 6.04% for the month, relative to 6.48% for August, but then popped back up to 6.20% in October before falling to 6.09% for November. And in fact, the conventional mortgage rate fell below 6% during the last week of November. The mortgage rates listed below give the false impression of relatively stable mortgage rates but one glance at the Mortgage Rate Chart will strip away the impression of stability in the mortgage market. The mortgage rate outlook generally suggests that rates will fall from their current levels as the recovery programs—which include low interest rates—are fully implemented. However, more gyrations could occur on the way there as surprise in the financial markets have become commonplace.
Mortgage Rates 6.09% 6.20% 6.21%
30-year fixed rate, conventional first mortgage (<$417,000)
Third Quarter Notices of Default and Foreclosure Statistics
The Quarterly NOD Chart shows the Valley NODs climbing to a peak of over 4,500 in the second quarter, then falling to just over 3,500 in the third quarter. New California legislation, Senate Bill 1137, which took effect in September, was at least partly responsible for this recent slowdown in NODs as they fell nearly 1,000 from 1,518 in August to 524 in September, accounting for the full difference between the second and third quarter levels.
Third Quarter foreclosures set a new quarterly record level at 2,589 foreclosures, far surpassing the early 1990s peak of 1,854 foreclosures during the third quarter 1996. The future course of foreclosures is unclear, but as reported above, October foreclosures are down from the September levels, and with NODs also falling off recently, Valley foreclosure rates are likely to follow suit.
Good news for renters! Apartment rents in the San Fernando Valley’s large apartment complexes remained virtually unchanged throughout 2008, varying between $1,582 and $1,587, and have increased only slightly (+1.3%) from the third quarter 2007. Rents in LA/Orange Counties and Ventura County apartment markets remained similarly stable in 2008, and rents have even inched down in Ventura County during the last four quarters.
Q3-2008 Q2-2008 Q3-2007
San Fernando Valley $1,588 $1,582 $1,567
12 month change +1.3%
LA/Orange Counties $1,662 $1,664 $1,630
12 month change +2.0%
Ventura County $1,543 $1,548 $1,548
12 month change -0.3%
Continued high apartment vacancy rates are a likely cause of the slow pace of Valley rent increases. Valley vacancy rates that were in the 4 percent range for most of the decade rose to 6 percent in 2007, and measured 6.1%, 6.0%, and 5.8% in the first three quarter 2008 according to data supplied by RealFacts, which surveys apartment complexes with over 100 units. The higher Valley vacancy rate also suggests that the relatively aggressive multiple family unit building program of the last few years may be easing pressure on rents in the Valley’s apartment market. In addition, the rising foreclosures may reduce pressure on apartment rents as some recently foreclosed units become available as a rental.
Vacancy Rates Q3-2008 Q2-2008 Q3-2007
San Fernando Valley 5.8% 6.0% 5.9%
LA/Orange Counties 5.4% 5.8% 4.5%
Ventura County 6.4% 6.0% 6.0%
The recent increase in the Ventura County average vacancy rate probably contributed to the minor slippage in average rents there.
San Fernando Valley Rents by Community: 1st Quarter 2008
Average community apartment rents in the first quarter ranged from just over $1,000 to just under $2,000. Glendale rents average $1,927 at the top, with Studio City close behind, to $1,056 in Panorama City with Pacoima just above.
Residential construction in the Valley fell off dramatically in the third quarter. Relative to third quarter 2007, single-family unit construction dropped 78.1%, or from 320 units in third quarter 2007 to 70 units in third quarter 2008. Multiple-family unit construction dropped almost as dramatically, down 71.6% or from 1,111 units in third quarter 2007 to 316 in third quarter 2008.
Year-to-date residential construction statistics present an equally dramatic picture for single-family unit construction which plunged 71.4% in the first three quarters of 2008 relative to 2007. This reflected a drop from 734 units in 2008 to 210 units for a comparable period in 2007. Multiple-family housing construction experienced a milder drop off on a year-to-date basis. For the first three quarters of 2008, multiple-family construction fell by only 11.6%, from 2,276 units in 2007 to 2,011 units in 2008.
This fall in construction activity has a substantial impact on the Valley’s economy. The drop Valley residential construction activity knocked $226 million out the Valley’s construction industry for just the third quarter of 2008 relative to 2007 (from $348 million in 2007 to $123 million in 2008). This drop in the value of construction activity reflects the drop in the permit values for all residential construction (new and additions and alterations) in the third quarter of 2008 relative to the same quarter of 2007. The year-to-date drop in the value of residential construction permits shows a drop in Valley residential construction activity from $833 million in 2007 to $553 million in 2008, a loss of $280 million in Valley construction activity during the first three quarters of 2008.
While these trends in construction activity are not terribly different from those in other states that experienced a substantial rise in home prices, sales, and construction activity during 2004, 2005, and 2006, and are now suffering substantial drops in that activity, the dollar loss to local economic activity creates hardships in all affected economies. And the Valley is no different in this regard. Undoubtedly, some of the rapid rise in the unemployment claims for the Valley is directly attributable to the local drop off in local construction activity.
Industrial Vacancy Rates
The San Fernando Valley industrial space market remains extremely tight while the Los Angeles County market loosened slightly and the US market softened even more. At a vacancy rate of 1.5% in Q3 2008, the Valley’s industrial space market has tightened slightly from where it was in Q3 2007, at 1.6%. The Valley’s current vacancy rate matches its lowest 2007 rate of 1.5% in Q2 and is only slightly above the lowest vacancy rate recorded of 1.3% in Q4 2006. Regionally, the East Valley dropped from 1.4% in Q2 to 1.1% vacancy in Q3, while the Central Valley slid from 1.4% in Q2 to 1.3% vacancy in Q3, and the West Valley actually rose from 1.8% in Q2 to 2.1% vacancy in Q3. In general, the Valley industrial space market has been largely unaffected by the recent economic slowdown.
Los Angeles County’s industrial space market is the tightest metropolitan market in the U.S. in the third quarter with a vacancy rate of 2.3%. However, the LA vacancy rate has loosened slightly from its 1.6% rate in Q3 2007. .
The US industrial vacancy rate stood at 8.5% in the third quarter 2008, up from 7.6% in Q3 2007. Clearly, both the Valley and the County industrial vacancy rates compare quite favorably to the US rate.
Commercial Vacancy Rates
The Valley’s office vacancy rate stood at 11.3% in Q3 2008, slightly down from 11.6% in Q2 but 3 percentage points higher than the 8.3% in Q3 2007. Office vacancies have steadily climbed since reaching their low point of 6.8% in Q1 2007, marking a reversal of the steadily declining trend in office vacancy rates that began at the end of the 2001 recession and continued to Q1 2007. Within the Valley, office vacancy rates generally have been climbing since their lows in early 2007 but the East Valley saw a rise during 2007 and into Q1 2008 (9.4%) but then fell back to 7.5% in Q2 and 8.0% in Q3 2008. The West Valley office vacancy rate climbed steadily to 17.3% in Q2 before dropping off to 16.6% in Q3. The Central Valley simply climbed steadily, registering 8.6% in Q3 2008.
Los Angeles County’s third quarter rate office vacancy rate, at 11.4%, registered slightly above the matches Valley’s 11.3% rate, and County’s vacancy rate has been on a steady climb in Q3 2007 when it bottomed out at 9.2%.
The U.S. office vacancy rate registered 14.3% in Q3 2008, considerably higher than the Valley and County rates. The National office market rate bottomed out in 2007, when it dropped to 13.0% in Q2 2007 and remained there until the end of the year when it began its current upward drift.
Office Lease Rates
The Valley’s third quarter office lease rates average $2.55 per foot, down from the average of $2.62 in the Q2 and on the lower end of the Valley’s 2007-2008 lease rate range of $2.54 to $2.63 per square foot. The Valley’s current $2.55 rate represents middle ground in the Los Angeles County office market. The Westside topped the County lease rates with $4.19 per foot, while the South Bay brought up the rear with $2.20.
Within the Valley, Studio City took top honors at $3.01 per foot, with Burbank coming in second and just over $2.91. Glendale commanded the lowest rate at $1.75, with Canoga Park averaging $1.85 per foot in the third quarter.
Non-residential construction data for the San Fernando Valley is prepared and reported annually. Please see our most recent SFV Annual Report for Valley non-residential construction data and analysis. 2008 SFV Economic Report