This recovery is the real deal – Still, some patience is required

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This recovery is real - still, some patience is required

California’s economy is finally in the first stages of a true recovery, according to Chapman University’s Inland Empire Economic Forecast. In the Inland Empire in 2012, evidence of the recovery included:
  • a 1.6% annual jobs increase, the greatest increase since the recession;
  • an 8.7% yearly increase in residential construction starts, the greatest since the recession;
  • a solid average home price increase of 8% on overall home sales; and
  • a steep decrease of 22-32% in notices of default (NODs) recorded.

Chapman expects similar positive movements across the state in 2013.

Will 2013 be a good year to buy or build a home in the Inland Empire? Chapman University says yes. They forecast:

  • the number of jobs will increase by 2.2% in 2013;
  • residential construction starts will increase by 14.6% in 2013;
  • home prices will increase 7% in 2013; and
  • interest rates will not increase until early 2014.

While the state’s economy will not slip back into a recession in 2013, upward movement will be slight. This weakness is due largely to the expiration of the payroll tax break, which increases the payroll taxes — and decreases the spending power — of employed Californians by two percentage points. As consumers have less money in their wallets ($1,000 less for the average Californian employee), less spending will occur across all sectors of California’s economy.

Chapman economists forecast California’s state income tax is another black cloud looming over the long-term economic recovery. California has the highest income tax of any other state, coupled with one of the highest sales taxes. As taxes continue to increase each year, Chapman feels wealthy taxpayers are more likely to leave California’s amenities behind and head for states with fewer taxes.

If this happens, the decrease of wealthy taxpayers will detract from the state budget. With a smaller state budget, there will be even fewer government workers and smaller pensions. Since the economy’s strength boils down to jobs, outward migration of wealthy taxpayers will be an issue going forward.

Insight

There is reason to be optimistic for California’s economy and housing market in 2013. But it is far too early to get carried away. Today is a time to proceed with caution, not wild abandon.

Jobs, while slowly improving, have a long way to go before completely recovering. Since the quantity and quality of jobs are paramount to California’s recovery, look first to employment to indicate the economy’s strength.

238,000 jobs were added statewide in 2012 — a 1.7% increase.

In order to return to pre-recession employment rates, California must add at least 350,000 jobs every year and sustain that rate for 18-24 months. By then, the interim growth in population will require another one million jobs and three more years will create them. Thus, 2019-2020 will be big years in real estate.

Likewise, other factors influencing the housing market predict recovery — but not a quick one. 

  • single family residential (SFR) and multi-family construction starts will continue to slowly improve, returning to normal around 2016 for multi-family starts and 2020 for SFR starts;
  • home prices will continue to experience month-to-month volatility, varying across price-tiers, while generally increasing with inflation through 2017; and
  • interest rates on mortgages will remain level through 2013, not to increase until 2015.

Additionally, and frankly, some economists ignore the evidence, and pander to their audience. Chapman University’s forecast on wealthy taxpayers fleeing California is dead wrong.

Anecdotal evidence (such as Phil Mickelson’s recent announcement that he plans to leave California due to the high tax rate on wealthy taxpayers like him) never makes a trend. In fact, research and data point to trends which state just the opposite.

Numerous studies show that wealthy taxpayers very seldom move due to tax rates. Instead, factors like jobs, costs of living (including housing prices) and local cultural amenities influence their decisions to move.

Lucky for California, entertainment hubs, coastal geography and job hot spots like Silicon Valley are going nowhere. Who would trade sunny California’s climate for tax havens like South Dakota or Nevada, if given the choice?

A comparably pleasant climate can be found in income tax-free Florida. However, Florida’s population has actually declined since 2008, likely in response to the many jobs lost during the recession.

In contrast, California’s population has continued to increase at a compounded annual rate of around 1% since the recession — increased taxes included, added with public acclaim. California also boasts a larger number and percentage of millionaires than Florida, despite our nominal high income tax rate, according to the Internal Revenue Service (IRS).

Thus, tax rates on high-income taxpayers have a de minimus effect on California’s economy: past, present and future.

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