Recovery Beginning, But Patience Is The Operative Word

There are clear signs that San Jose's labor markets are beginning to thaw after several years of pain. The region added 1,400 jobs to its nonfarm payrolls in May, and the unemployment rate ticked down to 11.5% on a seasonally adjusted basis. This represents a 0.8 percentage point decrease from the region's peak unemployment rate of 12.3% in December 2009. Despite the good news, it will take time before the region fully recovers. We are currently forecasting the unemployment rate to continue falling but to remain above 10% through the second quarter of 2011 and not dip below 7% until the end of 2014. San Jose will see stronger jobs growth than in neighboring regions, partly owing to its skilled workforce and the fact that its main industries (professional and business services, and high-skilled manufacturing) are expected to see a robust rebound. However, it will still take nearly three years for the region to reach its pre-recession peak of 920,000 jobs. The worst is over... but patience remains the operative word. 

What About Housing?

Although the San Jose MSA did not suffer from the extreme housing bubble that the Inland Empire or some areas of the East Bay did, home prices in the South Bay did not escape altogether. Prices in the region rose by 84% between 2000 and the third quarter of 2007, pushing the median price of an existing single-family home up from roughly $425,000 to nearly $780,000. By the first quarter of 2009, home prices had fallen by almost 45% from their peak to a level just above the 2000 median price. Despite the pain caused by the contraction, the South Bay's housing market is emerging healthier. After soaring to more than 14-times per capita income, home prices have returned to a more sustainable 9.5-times per capita income. This is slightly higher than the region's historical average of 8-times per capita income, and is partly due to federal government intervention in the form of cheap FHA loans, first-time buyer credits, and historically low interest rates. As these policies expire, we are forecasting slow price growth in 2010. However, as labor markets begin to heal and incomes start to rise, we expect to see prices get back into the $600,000 range by 2013 and then grow at a pace that is in line with incomes.

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2009 South Bay Economic Forecast Book.