In the last installment of the series “When is the Bottom”, I outlined some basic understanding of where the bottom may be based on when a housing-led recession ends. There isn’t a hard and fast formula, but the last Southern California housing bust of the 1990′s did not follow recessions, but rather took an additional 5 years AFTER the recession ended to finally bottom out in 1996.
The next myth is somewhat related to the first, in that unemployment is closely correlated with recessions. As unemployment peaks recessions tend to end or perhaps even peak after the end of a recession. Adding to much of this confusion, many economists for trade groups (such as CAR, California Accosiation of Realtors, the NAHB, National Association of Homebuilders, or even the NAR, National Association of Realtors) tend to favor a much more optimistic scenario than mainstream economists. This is in large part because these organizations which benefit from better economic fundamentals end up being an echo chamber of positive opinion. While a true analysis and forecast of the future would improve their ability to act in a crisis, the internal political landscape make issuing negative forecasts nearly impossible.
What that backdrop, the #2 myth is as follows:
Myth #2. Housing prices will begin to jump once unemployment begins to come down.
This one has a better logic behind it than the first myth. After all, wouldn’t more jobs put pressure on home prices? To a certain extent, yes. However the reality of the situation is much different. In a narrative form, the logic actually is much more complex:
Potential homeowner has seen over the past year or 2 how many of his/her friends, acquaintances, or parent’s friends took on too much debt or bought beyond their means and lost their homes, friends, and perhaps marriages and decimated their net worth through the bad decision of a home purchase. This kind of social conditioning is not easily forgotten. In addition, lessons learned in bad times are actually remembered by humans better than good times.
In the August issue of Current Directions in Psychological Science, a journal of the Association for Psychological Science, Boston College psychologist, Elizabeth Kensinger and colleagues, explain when emotion is likely to reduce our memory inconsistencies.
Her research shows that whether an event is pleasurable or aversive seems to be a critical determinant of the accuracy with which the event is remembered, with negative events being remembered in greater detail than positive ones. …
Kensinger argues that recognizing the effects of negative emotion on memory for detail may, at some point, save our lives by guiding our actions and allowing us to plan for similar future occurrences. “These benefits make sense within an evolutionary framework,” writes Kensinger. “It is logical that attention would be focused on potentially threatening information.”
The negative emotions being built by the current crisis (which is at least the worst financial, economic, and now political crisis in America for the past 80 years) will guide all participants for the remainder of their lives. The risk taking that was previously the norm will be much more subdued and muted.
We can see these instincts exhibiting themselves in this graph from the last 20 years of unemployment in California.
After the last housing bubble in California, housing prices fell as you can see below in a time when unemployment was falling. Indeed, at best, it seems, unemployment is a lagging indicator by several years as unemployment fell from 1982 to 1984 while housing prices also fell and from 1993 to 1996 while housing prices fell. 
Another alternative explanation for this phenomenon is that employment pressures build over time. Since renting is a better option for short-term occupants who may be unsure of the stability of their employment, rental pressures will build better in response to unemployment. And, not until rental prices outpace homeownership costs, home prices do not move up in a meaningful way until the stars are aligned.
However, in the present environment, while unemployment is rising and rental rates are falling, there is little likelihood that employment or rental parity will be pressures on the present home prices.
A more important point is that there are still substantial imbalances between the 2 californias, coastal and inland. While inland prices have cratered in the last year where several areas are showing an average of 70% off the peak prices, the coastal areas are showing more modest price pressure, where some even mistakenly believe that housing prices have done nothing but go up (much of coastal L.A. and Orange County). The bifurcated markets mean that while some measure of volume has returned to some areas, other, pricier, areas are still virtually frozen except for the occasional knife-catcher. In inefficient markets like thinly-traded housing markets, price discovery is normally a long-drawn out process where the market clearing prices may fall and rebound before buyers and sellers can come together in a normal market. At present course and speed, that “normal” market could be 3 to 5 years off into the future.
Check out my next installment, when I debunk the next myth: That California homeownership has been falling, and filthy-rich landlords with deep pockets are taking homeownership away from buyers desiring to buy their piece of California’s dream, effectively raising the market prices of homes.
