Commercial Real Estate Market Stability and Government Centers

Last week I posted on the merits of college town markets (although I glossed over the reasons – Chris Rodriguez goes into more detail in his post “Commercial Real Estate in College Towns – Recession Proof”). Markets with heavy concentrations of government employees also weather the storm better.

The charts below show the 12 month percent change in employment for the largest market in the state, and that state’s capitol. Starting with the state that’s always the worst:

Employment losses in Lansing are half those of Detroit. Next, Washington:

Employment loss in Olympia is a quarter of that in Seattle. On to Texas:

Austin is one of the few places that hasn’t lost jobs at all.

No discussion of government centers is complete without looking at Washington DC. Job losses there are half what they are in the nearest major market (Baltimore):

Government centers don’t always outperform; Sacramento and Albany performance is about the same as Los Angeles and New York respectively. But, as a general rule the relative stability of government jobs provides a safety net for their markets.

All data from this BLS site.

Retail CRE: Which Deals Get Renegotiated?

One answer: new, incremental deals in outlying areas. Calculated Risk put up this post a few days ago:

“We’re dumbfounded. We’ve been working on this deal for four-and-a-half years. I don’t know how, all of a sudden, the numbers don’t work.” JMW Development Principal Mark Johnson

From the Minneapolis / St. Paul Business Journal: SuperTarget planned for Woodbury now on hold (ht Arnold)

“Target recently informed JMW that it would not proceed with the project unless it receives “a pretty significant discount” from its previously negotiated deal, JMW Principal Mark Johnson said.
“We’re dumbfounded,” Johnson said, noting that Target officials had told him as recently as June 24 that the project was on track.”

Maybe Target has lowered their retail sales estimates for the store? Just saying ...

Woodbury is an outlying Minneapolis-St. Paul suburb, and already has a Target (“B” on the map below) which is eight minutes from the site of the proposed new store (“A”).

When it negotiated the deal for the new store Target was anticipating new residential growth in Woodbury which is now not going to happen. Without growth the new store won’t hit its numbers, and will cannibalize sales from the older store.

Commercial Real Estate Market Stability and College Towns

If you’re looking for CRE markets that are insulated from downturns, college towns are a good place to start. The Creative Class post “Where Unemployment Is Worse Than Expected” analyzes the performance of various metro areas in this recession. Here’s one of their graphs:

Low and to the left is good (Iowa City), high and to the right is bad (Detroit, Kokomo and Elkhart). An excerpt from the post:

College towns number among the best performers, doing much better than predicted: Champaign-Urbana, Illinois, home to University of Illinois (-2.2); Iowa City, University of Iowa (-1.81); Manhattan Kansas, Kansas State University (-1.82); College Station, Texas, Texas A&M (-1.74); New Haven, Connecticut, Yale University (-1.54); State College, Pennsylvania, Penn State University (-1.47); Boulder, Colorado, University of Colorado (-.93); Austin, Texas, University of Texas (-1.0); Ann Arbor, Michigan, University of Michigan (-.94); and Ithaca, New York, Cornell University (-.97), among others.

The correlation isn’t perfect; for example, the metros with the major Oregon universities (Eugene and Corvallis) have both underperformed. However, the relatively stable employment base and demand for services created by large universities tend to buffer these markets. And, since employment is the most important determinant of CRE performance, CRE in these markets tend to do better.

Bend, Oregon, and Elkhart, Indiana: Employment

I was in Bend, Oregon on Friday. For those not in the Pacific Northwest, Bend is famous for its unemployment rate. From the AP, on June 3:

The Labor Department said Wednesday that unemployment in April rose from a year earlier in all 372 metropolitan areas it tracks. Indiana's Elkhart-Goshen's rate jumped to 17.8 percent, up 12.7 percentage points from a year ago. The Indiana region, which posted the largest increase from last year, has been pounded by layoffs in the recreational vehicle industry.

The second-highest jump occurred in Bend, Ore. Its rate rose to 15.6 percent, up 9 percentage points from last year.

So how much is Bend like Elkhart? If you look at unemployment, they’re pretty similar:

Bend:

Elkhart:

However, the change in employment is a much different picture. Absolute numbers:

And percentage change:

 

Elkhart has lost almost 15% of its employment base – Bend less than 5%. Unemployment figures are interesting, but in evaluating the health of a local economy I think the number of people with jobs is much more relevant.

Employment data from this BLS site.

Home Court Advantage in Real Estate

Home court advantage is a huge factor in sports; for example, historically the home team in deciding games has won 78 of 97 games up until the second round of the 2007 NBA Playoffs. There is a comparable effect in commercial real estate.

I learned about real estate home court advantage from Gus Williams, the Seattle-based basketball star that led the Sonics to their 1979 championship. Somehow Gus ended up as the primary investor in a strip retail center in Selma, California. Selma is a town about 20 miles south of Fresno on Highway 99. You’re probably heard of tertiary markets – Selma is a quaternary, or maybe even a quinary market. I’m not sure how Gus’s money got into the deal, but I can tell you it never got out, because the Los Angeles lender I worked for foreclosed on the center in the early 1990’s.

It’s not noteworthy when a professional athlete loses money in real estate. What distinguished this piece of REO was that fact that absolutely no one would buy it. Months passed, the listing price was reduced again and again, but nothing. Finally, the local businessman who sold the property to Gus came forward and put us out of our misery with an offer which was a small fraction of what he got from Gus five years before. We (and Gus) were the away team, and the home team blew us out.

Local investors are starting to step up this time around too. From Zero Hedge:

The Buffalo News reports that REIT Developers Diversified Realty is selling back 11 upstate New York shopping malls to the entity it originally purchased them from, Benderson Development Co., at a 30% discount to their 2004 purchase price…“It’s good that the ownership is going in the direction that it is,” said Michael C. Clark, director of retail tenant services at CB Richard Ellis in Buffalo. “There’s going to be a lot of markets in other parts of the country where they have portfolios for sale by different REITs and they don’t have someone like Benderson to step up.
“We’re pretty fortunate in terms of the market, in regard to that. How much better can you get than the folks that developed them and are intimately familiar with them and live and breathe here? They certainly know what they’re doing,” Clark said.

The Zero Hedge spin is that CRE values have fallen, but that misses the real point of the story – a REIT based in Ohio is not going to do a good job pricing and operating malls in upstate New York.

Another example is from the Portland Oregonian, via Portland Housing Blog:

Portland condo king Homer Williams is pursuing a surprising new business.

With the residential real estate market struggling, Williams has turned to a newly hot commodity: failed bank loans.

Williams confirmed that he's the man behind BCC Fund I Limited Partnership, which the FDIC identified this week as the successful bidder for two packages of loans from the defunct Bank of Clark County.

The FDIC auctioned the loans last month from the Vancouver bank that failed in January.

Williams declined further comment. But according to the FDIC, BCC Fund 1 paid just more than $2 million for one bunch of loans with an outstanding balance of $6.1 million. BCC also successfully bid $3.3 million for a group of 53 other loans with an outstanding balance of $10.3 million.

That means BCC paid about a third of the outstanding balance of the loans.

Buying a loan from the FDIC is buying a pig in a poke (REIT Wrecks has a great post on that here), but I have to believe a Portland developer buying loans from a failed Portland bank is going to do better than a hedge fund out of New York.

Moral of the stories: keep the home court advantage.

Rent or Buy: San Jose or Columbus?

David Leonhardt has an article in The New York Times (hat tip Wehr in the World) about his decision to switch from renting to buying a house. There is an accompanying graphic showing the ratio between the purchase price of a house and the annual rent for an equivalent house by city. I’ve highlighted the ten markets with the highest ratio in green, and the ten markets with the lowest ratio in red:

(Click on image for a larger version in a new window)

To me the most interesting thing about this information is the premium people are still willing to pay to own a house in bubble markets. The ten markets with the highest ratios are all California coastal cities, south Florida, and New York and Boston. The cities with the ten lowest ratios are all Midwest cities, plus Pittsburgh, Dallas, and New Orleans.

The city with the highest ratio is San Jose (30.7); the lowest ratio is Columbus, Ohio (11.4). Keep in mind we are not comparing house prices and rents between the two cities, we’re comparing the ratio between house prices and rents within the city. People value ownership in San Jose much more than in Columbus.

There is a long term trend away from the Midwest and to the coasts. The reasons are complex, but boil down to changes in the employment base and geographic attributes of the areas like weather and topography. For more on the employment base issues, a good starting point is Richard Longworth’s Caught in the Middle: America’s Heartland in an Age of Globalization. For more on the role of geographic attributes, see the research of David McGranahan, an economist with the United States Department of Agriculture (summarized in this post).

When Real Estate Is A Liability: The Movie

I’ve previously posted about how real estate values can fall close to zero here and here, and the importance of completing projects here. This video of new homes being demolished at the direction of the foreclosing bank takes the concept to a whole new level:

This is not as crazy as it appears when you know the bank’s side of the story, available on this post from Vision Victory Manifesto (also the video source). An excerpt:

“Our only option is to either proceed with putting more than a million bucks into the land, which we’ve already taken a huge hit on and lost a lot of money, or, we tear down the houses,” Smith [Guaranty Bank official, Real Estate Officer Dean Smith] said.

He said the builder put up the homes before completing the site improvements and failed to have enough money to finish roads, walls, and other improvements that bring the community into code.

“Everything just fell apart at that point and we can’t sell homes that are not up to code,” Smith said.

He said the city of Victorville fined the bank once because the home are out of code and would have faced daily fines if Guaranty didn’t do something with the vacant houses.

“There are still substantial dollars that need to be put into the land before the city of Victorville will give certificates of occupancy on the houses and the bank isn’t willing to put forward that amount of money,” Smith said.

If the bank was just looking at the cost of finishing the houses, it probably would have made sense to do so. But, when you have to put in roads and other site improvements too, that probably tipped the scales in favor of demolition. Obviously, it’s really bad lending practice to advance funds for house construction and not have enough in the budget to build the roads to the houses.

Another factor was that, in the bank’s view, it would be at least five years before the market recovers to the point the houses would sell. That’s believable, given the market is Victorville. The video mentions other homes being demolished in Temecula, which is also a distant exurb:

More on the problems exurbs are experiencing here, here, here, and here. Neither the video nor post identifies an exact location of the homes being demolished, but here’s an image of the crossroads mentioned:

The combination of exurb market, fringe location, and poor construction loan administration will result in losses in this kind of market.

Everyone Picks on Detroit

As usual, Detroit once again has suffered the largest population decline and net outmigration of major metropolitan areas on both an absolute and percentage basis (Census data released March 19 here). Mark Perry’s Carpe Diem post, “Supply and Demand in Action,” displays the image below:

 

But the larger story is the continuing depopulation of rural counties in states like Arkansas, New Mexico, and Oklahoma. Here’s the list of counties with the greatest percentage net outmigration in 2008:

Interesting that no Michigan counties made the top 20. I’ve previously posted on the “natural amenity” explanation for why places like this are depopulating.

Does the Relationship Between Median Income and Home Values Explain the Housing Bubble?

It’s taken as a given that one of the reasons housing is in crisis is that home value increases have significantly outstripped income growth (see, for example, these posts at The Big Picture, Option Armageddon, and Calculated Risk). Here’s a chart from Calculated Risk showing the relationship over time:

(Click on image for a larger version in a new window)

An excerpt from Option Armageddon explains:

Ask yourself, what is a housing “bubble” and how is one created?  The term “bubble” suggests that prices were, objectively speaking, “too high.”  Clearly this was the case.  A chart of house prices relative to median income makes it abundantly clear.  House prices can’t continue to expand forever, not unless incomes expand at the same time.  If prices are expanding faster than income, then prices are “too high” relative to what people can actually afford to pay for shelter.  In other words, we have a bubble.

This is common sense. But is it true? If it is, you would expect that there would be more foreclosures in markets where the ratio was higher. But that’s not necessarily the case.

Via Creative Class, a study from University of Virginia researchers found:

In San Francisco, for example, median value of owner-occupied housing in 2007 was 9.7 times median family income, yet the foreclosure rate was a mere 0.24 percent. In the District of Columbia, housing values were 6.8 times family income, yet the foreclosure rate was 0.12 percent. And in New York City, housing values were 12.3 times family incomes in Brooklyn (foreclosure rate 0.38), 11.7 times income in Manhattan (foreclosure rate 0.04 percent), and 10.3 times family income in the Bronx (foreclosure rate 0.28 percent). Other central cities lacked such extraordinary house value to income ratios, but in no instance were low foreclosure rates associated with low house value to income ratios (Table 4).

Here’s the table:

If the relationship is true, why does San Francisco, which has a value-to-income ratio triple the national average, have a foreclosure rate that is 1/3 the national average?

There is clearly something going on that can’t be expressed in a simple ratio. My suggestion is that bubble markets tend to have relatively low income levels and relatively high concentrations of single family rentals (see this post for a more detailed explanation).

Where Do Americans Want to Live?

The top five metro areas are Denver, San Diego, Seattle, Orlando, and Tampa, according to Pew research reported in this New York Times opinion piece.

The author, David Brooks, gives a number of reasons why, but this one caught my eye:

These are places (except for Orlando) where spectacular natural scenery is visible from medium-density residential neighborhoods…

One of my favorite themes is the link between natural amenities and market growth. Weather, water, and topographic diversity correlate highly with long term growth trends, and all these cities have very high natural amenity scores.

Best Article Yet on the Residential Housing Collapse

George Packer has written a great article, The Ponzi State, in the February 9 New Yorker (the link is to the abstract but the full article requires a payment if you’re not a New Yorker subscriber). Here is an excerpt:

Driving around Florida’s ghost subdivisions, if feel not just that their influence is waning but that they are physically hollowing out. In a place like Lehigh Acres, near Fort Myers, where half the driveways are sprouting weeds, and where garbage piles up in the bushes along the outer streets, it’s already possible to see the slums of the future. More and more of the residents in Hamilton Park will be renters like Lee Gaither. The vacant houses in Country Walk will be boarded up. The St. Augustine grass in the front yards of Tanglewood Preserve will grow three feet high. The open fields with street lights but no houses will become dumps.

Economic and Real Estate Post Picks: Week of February 2, 2009

Sharp Contraction in Trade: Both imports and exports have gone off  a cliff

Jobs Forecast by State and Sector: Interactive map and charts of a Moody's Economy.com forecast of job loss/gain by sector and state through 2012

The Housing Market: 1982 versus 2009: A comparison of our current situation with the situation in 1982

The Behavior of LIBOR in This Economic Crisis: Very detailed discussion of LIBOR and its recent movements

Upcoming Economic Indicator Releases: A useful calendar of upcoming economic indicator releases, with links directly to the data sites.

Pittsburgh versus Phoenix, Football and Growth

Although Pittsburgh had the better football team (at least this year), Edward Glaeser picks Phoenix as the long term growth winner:

The Super Bowl was a reversal of fortune because Phoenix is one of the country’s biggest boom cities and Pittsburgh continues to lose population. Since the last census, Phoenix’s population has grown by 927,551, more than any metropolitan area except Atlanta and Dallas. Over that time, the Pittsburgh area has lost more than 75,000 people, more than any city other than Katrina-beset New Orleans.

Why?

The great boom areas of the 21st century — Atlanta, Dallas, Houston and Phoenix — are expanding because of a combination of warmth and willingness to build. While geography made Pittsburgh’s rise inevitable, Phoenix has few innate natural advantages, other than sunshine. Instead, it has mile after mile of desert, which it is covering with thousands of attractive, affordable homes.

Warm temperatures don’t count for everything, for example, Denver and Boise, for example, both have strong long term growth trends and are not particularly warm places. When you account for a few other natural amenities like mountains and water you get a better picture of which areas grow and which don’t. David McGranahan of the U.S. Department of Agriculture has studied the effect of natural amenities on growth for many years. I’ve previously posted on his work here.

The Housing Market is not Like the Stock Market

If you own some shares of Microsoft, you won’t have any trouble selling it - on average, more than 80 million shares of Microsoft trade every day the market is open. If you own a home, the situation is completely different.

Here are the Microsoft numbers:

Trading Days in 2008	250
Microsoft Avg Daily Volume (1)	80,406,925
Annual Volume	20,101,731,250
Shares Outstanding	8,895,573,000
Annual Volume/Outstanding Shares	226%
(1) 50 day average as of 1/30/09

The market for Microsoft stock is thick. The housing market, to understate, is thin. Here are the equivalent numbers:

Existing Single Family Home Sales	4,260,000
Existing Single Family Homes	84,781,485
Sales/Homes	5%

Everyone learns in Investing 101 that thinly traded markets are relatively illiquid. The homes being sold now are overwhelming not voluntary sales. They are being sold out of foreclosure, are forced sales as a consequence of the owners situation, and are new homes working their way through the development pipeline. It is no surprise these homes are subject to dramatic markdowns given the lack of buyers in a market that is thin to begin with.

Fortunately, the vast majority of homeowners do not view their housing investment like a stock; homes are first and foremost places to live. Those unfortunate enough to have to sell in this market or who are overleveraged and can’t service the debt will experience losses. The rest of us are just like long term investors with a dividend stream, but in this case the dividend is living in a home we like paying an amount we can afford.

The sales estimate is from the National Association of Realtors as of December, 2008, and the number of homes is from the Census.

Why Does CRE Go So Bad So Fast?

CRE problems are escalating rapidly. There is a good CoStar article here discussing the trend. A chart from that story speaks volumes:

(Click on image for a larger version in a new window).

Why do problems escalate so quickly? I don’t have definitive answers, but I can offer three analogies which based on my experience have some validity.

The Blighted Crop Analogy. I grew up in farm country (eastern South Dakota). Crop farmers have really good years, ok years, and really bad years depending on what they planted and weather conditions. Here is a picture of what things look like in a really bad year:

Note this is not a mixture of corn plants doing well and doing poorly; every plant is suffering is a result of environmental conditions. So, under this analogy CRE deteriorates rapidly because the conditions which stress CRE stress all CRE projects. Severe employment loss, high interest rates, liquidity crunch limiting refinance options, etc. are all stressors which have played a part now and in the past. One of the profoundly stupid things you hear some people say is “XYZ lender is not taking enough risk, their loan delinquency rate was only X% last year.” That’s now how it works – you have no delinquencies for many years, and then conditions occur which cause your delinquency rate to skyrocket.

The Vintage Analogy. The is a strong correlation between CRE performance and Loire whites; 1991, 1992, and 2001 were bad years for both. A vintage table courtesy of Robert Parker:

Seriously, like wine, loans are made under conditions which vary over time. There are always a substantial contingent of borrowers who want the absolute maximum leverage a lender will give them, and the willingness of lenders to satisfy that demand goes up during good times. So, during times of peak rents and occupancy levels there are a lot of loans done using aggressive underwriting parameters, and when market conditions soften those loans all go upside down at once. I don’t know how good 2006 and 2007 Loire whites will be, but I am confident those will be bad origination years for CRE loans.

The Blood from a Turnip Analogy. There is a perception that CRE borrowers readily walk when their deals go upside down, because they are coldhearted businessmen constantly evaluating the economics of their deals (as opposed to warmhearted homeowners irrationally committed to their residences), and because their loans tend to be non-recourse. Here, for example, is a Calculated Risk post which takes this position.

In my experience, that isn’t how it goes. Undoubtedly some owners walk early, but in my experience most CRE borrowers feed their deals until they’re tapped out. I’ve written why I think that happens here. CRE owners tend to own multiple properties. As problems develop, they bleed the properties performing well to support the underperformers. This works for a while, but if difficult conditions persist the lack of reinvestment in the good properties drags them down too. None of the properties default, until they all do.

Individually, none of these analogies explains the entire phenomenon, but taken together I think they account for why CRE problems escalate so rapidly.

Not Everybody’s Recession is the Same

Mark Perry in Carpe Diem says the 1990-1991 recession was relatively short and mild, but that media reporting on severity was hysterically overblown. For example:

"There is no question but this is the worst economic time since the Great Depression.”

 

“.....the worst plunge since the Great Depression.”

 

"This is the most severe economic dislocation we've had since the 1930s. Few are immune."

There are eleven such quotes in the post. When you go back to the original sources, here is how they break out:

• Four refer to specific indicators (e.g., sales, pessimism, job loss)
• Three (in fact, the three cited above) refer to geographic areas (e.g., California, Great Britain)
• One refers to a specific demographic group (white collar employees)
• One refers to a forecast of the severity
• One refers to a specific time period (worst three year period)

This is a good reminder that, which the aggregate data for a recession gives one picture, there is a lot of variation in the geographic distribution and dimensions of each recession. James Hamilton at Econbrowser has some great posts on recession variations between states here, here and here.

Foreclosures in the Exurbs

Foreclosures are concentrated in the exurbs. I’ve previously posted here about how this is primarily a vintage problem; in these new developments the houses were sold and financed in a relatively short time frame at the peak of the market using aggressive financing, and hence when the downturn occurred these neighborhoods have been hit in a very concentrated way.

Green Valley Ranch, a development on the outskirts of Denver, is a poster child for this problem. From an April, 2008 USA Today story:

This small corner of the Mile High City represents an extreme example of how foreclosures are transforming lives and neighborhoods. On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors…

     Many neighborhoods in Denver and across the nation have largely been spared from that tide, but others have been hammered.

     That's especially true here, along the broad avenues of Green Valley Ranch, a remote subdivision of soft-colored houses with red-tile roofs sewn into the vast carpet of flat, open land on the city's eastern edge. As Denver's housing market boomed at the beginning of this decade, the area became a magnet for low- and middle-income families buying their first homes in the kind of brand-new neighborhood they once thought would always be beyond their reach. Some turned to more-expensive subprime loans, which charged higher interest rates to borrowers with bad credit. Others got adjustable-rate mortgages and saw their payments increase sharply after two years.

This is Green Valley Ranch’s location:

Here is a map from the USA Today article showing foreclosure activity in the neighborhood between 2006 and 2008:

(Click on image for a larger version in a new window)

Note that this is happening in Denver, where home prices have  remained relatively stable (see this post for information on Denver’s performance relative to other markets).

Why Are the Nation’s Worst Housing Markets in the Exurbs?

Housing Wire has a list of the 20 worst housing markets in the United States, as measured by the percentage of homes which are worth less than their mortgages. Here are Google satellite photos of the worst 4:

#1 Zip 95391, Mountain House, CA. You can read more about this unfortunate place in this New York Times article.

#2 Zip 89166 (Clark County, NV):

#3 Zip 89178 (Clark County, NV):

#4 Zip 95742 (Sacramento County, CA):

See a pattern? All of these are new developments at the outskirts of suburban areas.

There is a theory that the collapse of these nascent communities is attributable to high gas prices (see this post in Econbrowser and this article in Muninet Guide, for example). That might have been a contributing factor, but it’s not the primary problem.

The primary problem is one of vintage. In a developed neighborhood, only a small percentage of homes sell and are refinanced in any given time period. In a new development, everyone buys and finances in a relatively compressed time frame. These communities all hit the market during the peak of the underwriting craziness, so a much higher percentage of homes in these areas ended up overleveraged.

Which Markets Have Lost the Most Jobs?

Employment has suffered the most in Detroit (no big surprise there). However, there are some surprises in the other rankings, including which markets have held up the best.

A word on methodology. I looked at the highest employment level in each market since January, 2000, and compared it to the latest level. All data is from BLS Local Area Unemployment Statistics.

Here are the results:

Employment as of November, 2008	Peak Since 1/2000	Current	Change from Peak	% Change from Peak
Detroit	2,217,186	1,899,782	(317,404)	-14.32%
San Jose	962,408	845,417	(116,991)	-12.16%
San Francisco-Oakland	2,250,832	2,138,050	(112,782)	-5.01%
Chicago	4,721,131	4,542,407	(178,724)	-3.79%
Los Angeles	6,307,149	6,098,378	(208,771)	-3.31%
Riverside-San Bernadino	1,711,443	1,658,533	(52,910)	-3.09%
Atlanta	2,650,838	2,569,010	(81,828)	-3.09%
Washington DC	2,967,601	2,882,203	(85,398)	-2.88%
Miami	2,739,126	2,668,358	(70,768)	-2.58%
Orlando	1,070,271	1,048,644	(21,627)	-2.02%
Denver	1,346,897	1,323,378	(23,519)	-1.75%
San Diego	1,485,911	1,468,666	(17,245)	-1.16%
Sacramento	1,003,441	994,697	(8,744)	-0.87%
Dallas	3,023,034	3,005,173	(17,861)	-0.59%
San Antonio	906,335	902,089	(4,246)	-0.47%
Austin	831,555	829,083	(2,472)	-0.30%
Houston	2,680,121	2,675,806	(4,315)	-0.16%
Las Vegas	936,369	934,956	(1,413)	-0.15%
Phoenix	2,022,781	2,022,725	(56)	0.00%

Detroit employment peaked in June, 2000, and has lost jobs ever since. Here is a chart showing year over year job loss for this market:

(Click on charts to open larger versions in new windows)

The market with the second worse performance is San Jose. It, along with San Francisco (to a much lesser extent), has never fully recovered job losses sustained in the dotcom bust. Here is the year over year chart for San Jose:

The best performing markets are also something of a surprise: Las Vegas and Phoenix. Both of these markets have severely distressed housing markets, and the conventional wisdom is housing difficulties drag down employment. Here are the charts for these two markets:

Finally, let’s discuss Riverside-San Bernardino for a minute. There is no question this market is hurting – I’ve discussed it previously here and here. But, a Bloomberg story with Calculated Risk commentary suggests a parallel between Detroit and this market because both have the same high (9.5%) unemployment rate. I think it’s wrong to suggest Detroit’s situation, which has had sustained job losses for eight years totaling 14.3% of it’s peak employment base, is similar to Riverside-San Bernardino, which has only lost jobs for a little more than a year and is down a little more than 3% from it’s peak. I’ve previously argued unemployment is not a good measure of market distress, because it’s possible to have very high unemployment rates and still have positive employment growth.

You can download a free report which provides similar employment charts on many other markets here.

Who Cares About Unemployment?

Obviously, a lot of people, and not just those that are unemployed. But is the unemployment rate a good measure of how a local economy is doing?

Here is a chart of year over year employment change and the unemployment rate for McAllen, Texas:

(Click on chart for a larger version in a new window)

In January, 1999 the unemployment rate was pushing 20%, but between January, 1998 and January, 1999 the local economy added nearly 5,000 jobs. In fact, McAllen has added jobs in every year over year period for more than 10 years, during which time the unemployment rate never dipped below 5%. It seems pretty clear employment can be increasing despite a relatively high employment rate. And, I would argue the change in employment is a better indicator of an area’s financial health than it’s unemployment rate.

Data from BLS Local Area Unemployment Statistics