Tuesday, August 08, 2006

Los Angeles Business Journal: Pricey L.A. Housing Crimps Recruitment - "As soon as we mention that the position is in L.A., they hang up the phone"

Wow, I hadn't thought of the details of how the out-of-control Los Angeles housing market was affecting people besides what they had to pay for housing. But employers are being hit hard and dealing with the fallout, according to this August 7 Los Angeles Business Journal story (registration or $$ required).

Federal government agencies are especially being hard hit. Salaries are set by Congress so the Federal government is unable to raise the salaries of those in L.A. county to help employees meet their housing costs. It's true that Congress allowed a 10% adjustment to the Los Angeles area but for those who live here you know that is laughable. There has been an exodus of workers from this area and the government is not having much luck finding replacements. At a more local level, the vacancy rates among firefighting and law enforcement agencies is extremely high. Gives you a warm comforting feeling, doesn't it. Who's going to bring order when people hit the streets rioting because of housing costs? The median-salaried ($50,000) federal worker with a family of 3 actually qualifies for low-income federal housing assistance!

It wouldn't be too much of stretch to say that a credit bubble of our own making is actually endangering our national security.

Public and private companies have more flexibility. Some have moved all of their operations out of state, such as Nissan Motor (to Nashville, Tennessee), or are expanding their operations only in other states, such as Mercury Air.

The article says that employers are having great difficulty helping prospective recruits find homes for rent. Will that remain so? I've been seeing more rentals in my area (Redondo). Personally, I think market pressures will keep the rental market in control, because I've witnessed some homeowners, unable to sell their homes, put them up for rent instead. But that's just my opinion, and I don't have a way to number-crunch that.

Here is the full article:


Posted date: 8/7/2006

Pricey L.A. Housing Crimps Recruitment

By HOWARD FINE
Los Angeles Business Journal Staff

As chief executive of a mid-sized Los Angeles company, Joe Czyzyk spends more time 
than ever these days trying to minimize the impact of L.A’s stratospheric housing 
prices on his bottom line.

Czyzyk, chairman and chief executive of Mercury Air Group Inc., readily admits to 
having to make “significant housing adjustments” to recruit mid-level and top-level 
executives. Over the last few years as housing prices have soared, those adjustments 
have ranged as high as $75,000 in additional compensation.

“Offsetting housing costs has actually become a line item on our financial 
statements. It’s a big number,” said Czyzyk, who also tries whenever possible to 
steer new recruits to the company’s other offices in Colorado Springs and Houston.

Even as housing prices appear to have reached a plateau – with the median price 
falling back slightly last month to $550,000 – they are still more than double what 
they were five years ago and more than double the nationwide median of $230,000.

Employers all over the L.A. area are dealing with the fallout.

Recruiting from outside the region has become increasingly difficult, and companies 
that traditionally picked up a portion of the housing costs are now finding that 
those costs are exploding.

The impact has been extreme on federal government agencies, which employ more than 
53,000 people in L.A. County. Unable to raise salaries that are set by Congress, 
federal agencies have experienced an exodus of employees seeking cheaper places to 
live and have been unable to find replacements. Some agencies, particularly those 
with firefighters and law enforcement officers, have vacancy rates over 40 percent, 
leaving them barely able to perform their basic functions.

“This has been building for years, but it’s critical now because housing prices are 
now way beyond the ability of most federal workers to afford,” said Kathrene Hansen, 
executive director of the Federal Executive Board of Greater Los Angeles, a federal 
entity that coordinates federal activities at the local level. “Agencies don’t have 
enough people to staff vital functions, like inspecting ships coming into port, 
staffing the courts or processing immigration and social security claims.”

Her board issued a report late last month that stated “thousands” of “important 
positions” are vacant, with the problem getting worse. “We simply cannot find and 
keep enough good people. The foundation is crumbling,” it stated.

Blocking transfers
Chester Widom, a partner in the Santa Monica-based architecture firm WWCOT, said the 
situation has gotten so bad for his company that there’s a concern it won’t be able 
to staff up quickly enough to take on more projects.

“We’ve always tried to help with some of the housing costs. But if someone who lives 
in a large $500,000 home in another state wants to find an equivalent home here, 
that’s over $1 million. We can’t make up that difference,” said Widom.

Local federal law enforcement agencies have now taken the extreme step of forcibly 
transferring employees to their L.A. offices from other parts of the country – 
employees who sometimes are unable to bring their families along because they can’t 
afford to house them. Many federal agencies here are also blocking almost all 
transfer requests and forcing employees to work overtime, Hansen said.

While federal agencies have traditionally lagged the private sector in pay, the 
doubling of housing prices in the Los Angeles area in the last five years has turned 
a perennial problem into a crisis. The slight adjustment to L.A. area salaries that 
Congress has allowed – about 10 percent above the national average – has not kept up 
with the region’s spiraling housing costs.

Indeed, the disparities are now so great that the median-salaried federal worker in 
Los Angeles with a family of three who pulls in $50,000 a year now qualifies for 
low-income federal housing assistance.

To combat the vacancies, federal agencies here are mounting a push to get Congress to 
grant housing allowances for employees in Los Angeles and the Bay Area of up to 60 
percent of base salary, just as the military already does.

But the last time such an effort was tried, at the peak of the last housing boom in 
1990, the effort fell flat because lawmakers from other states objected. “It was the 
‘Anywhere But California,’ treatment,” Hansen said.

Private sector companies, though, have more flexibility. As housing prices have 
soared here, they’ve been able to shift operations to lower cost areas. One of the 
major reasons why Nissan Motor Corp. chose to move its North American headquarters to 
Nashville was the lower cost of living, especially housing prices.

And while some companies have relocated entirely, many more are keeping a presence 
here but are growing their operations in other lower-cost states, as Mercury Air is 
doing.

Those that can’t easily shift operations have found creative ways to cope with the 
problem.

For example, at Los Angeles-based Psomas, an engineering firm, executives are taking 
advantage of technology to have out-of-state engineers work on local projects.

“We can actually have engineers in Salt Lake City work on projects in Southern 
California that don’t have to live here. With housing prices the way they are, that’s 
a tremendous cost-savings,” said Jacob Lipa, president of Psomas.

As for bringing people in from out of state, that’s becoming nearly impossible these 
days.

“We offer them relocation money, but it’s not enough,” Psomas said.

Affordable housing
Many companies are offering to pay closing costs and points for their employees’
mortgages, but are now seeing those costs explode. Others are bringing in corporate
relocation consultants to walk potential recruits through the costs and pitfalls of 
moving to L.A. before the candidates agree to take the posts.

“Before, we used to be brought in at the very end of the process, to help the recruit 
actually move. Now, we’re being called in earlier and we spend most of our time 
working to convince the person that ‘Yes, despite what you may have heard, you can 
find a place to live here that you can afford,’” said Barbara Blake, co-owner of 
downtown L.A.-based Quest Relocation Group.

Blake said that most outsiders don’t realize how many different neighborhoods with 
different housing price ranges there are in the L.A. area. “We almost always find 
something that a job prospect can afford in an area they want to live in,” she said. 
The only exception: homes for rent. “There’s almost none left right now in this 
market.”

Many times, though, companies never get a chance to dispel the notion that it’s 
impossible to find an affordable place to live in Los Angeles.

“Many candidates don’t even get as far as coming out here for the interview. As soon 
as we mention that the position is in L.A., they hang up the phone, saying the 
housing costs are way too high,” said Betsy Berkhemer-Credaire, co-owner of Berkhemer 
Clayton Inc., a retained executive search firm also based in Los Angeles.

Others who do come out see the sticker-shock first hand and often leave.

That’s what happened at the Los Angeles Biomedical Research Institute, a non-profit 
research lab just outside Torrance.

“We tried to recruit a very competent researcher from Birmingham (Ala.), but he was 
looking at comparable housing being five times more expensive,” said president and 
chief executive Kenneth Trevett. “He never came back for a second visit. We had a 
professional meeting of the minds, but the issue was housing, pure and simple.”

In cases like that, increasing a salary offer 10 percent or 20 percent or offering a 
substantial lump sum relocation payment up front doesn’t come close to bridging the 
gap.

As a result, Berkhemer-Credaire said she now recommends that companies looking to 
fill local positions stick to the L.A. region for recruiting. That way, most 
candidates are likely to already have a suitable place to live and don’t have to 
worry about buying or renting a place.

“It’s a greater and greater plus on your resume to indicate you live in Los Angeles 
and even more of a plus if you live in housing that’s relatively close by,” she said.

10 Comments:

Blogger Wannabuy said...

Bearmaster,

As an LA based hiring manager I 100% agree with this article. Normally we recruit about 50% from out of state (mostly Perdue, Pen State, and MIT graduates to add some mindset balance to California graduates). At this point, we can hire the recent college graduate, but not the experienced 30+ professional.

One of my uncles was getting ready to expand his medical practice to accomodate the large untapped medicaid patient base. After interviewing candidates he and his partner discovered that their extra time spent with additional patients would have resulted in a loss. Thus... he's forgotten about early retirement and will instead take time now to golf.

This is going to be ugly. In the two to three years it takes housing to correct, hundreds of thousands of middle class jobs will leave the state. :(

If medicine, engineering, and banking cannot support these housing prices, what's left? The fact that Hollywood is cutting movie production disqualifies most people's first guess. Even the lawyers I know cannot consider buying in the south bay.

And Thornberg has done a nice job pointing out how since 2001 our job growth has been those who build homes, those who finance/sell homes, and those who do retail to fill up homes.

What distressed me even more is that traditionally the strong California middle class drives inovation to pull us out of every recession. Too many of that middle class now live in other states...

I expect to be able to afford a home in 2 years in the south bay. With fundamentals being what they are, I expect the standoff to continue for a bit longer as we hear news from San Diego and then... panic.

Or maybe all of those unoccupied homes in Redondo are my imagination. ;) Eventually, the alligator bites.

Neil

12:17 PM, August 08, 2006  
Blogger bearmaster said...

I have no particular reason to believe that home prices will be done correcting in just 2-3 years. Why do you expect this to be over so quickly?

12:27 PM, August 08, 2006  
Blogger Wannabuy said...

Bearmaster,

As to a short timeframe... Its a hunch. Why? Mortgage lending is about to wise up. As soon as that pulls the floor out from the current market, prices will drop. We then have round 1 of foreclosures starting around Christmas. Round 2 (the big wave) starts around the end of 2Q2007. Round three 4q2007. Thus by round 3 in 2Q2008, prices will be reasonable.

At the bottom? Nope. There is a utilization value to a home. I also plan to buy before the absolute bottom. Why? I'll buy in under high selection when I can get a location I like.

But I must be patient enough to buy in after captitualization. With so much of the stock in speculators hands and such low savings... I do not expect this to be like 1991 to 1995 where laid off aerospace engineers survived off of savings and "odd-jobs" for years.

This time I doubt most flippers could get by for 6 months once the HELOC tap is shut off. I'm well aware that tap is still flowing... But soon it won't. At that time debt won't be paid with more debt... instead we'll have a start to market rationalization.

I also expect the NRT to be reformed and clean out homes rapidly in 2007 and 2008 creating an unusually fast drop in home prices and thus earlier road to recovery.

The nice thing is, I'm in no rush... so if I'm wrong, I'll just wait another year or two. :) Shall we agree to disagree on the timeframe and re-discuss in 2Q2008? ;) Until then, I'll keep saving and reading bubble blogs. :) If this turns out to be a truely symmetrical correction... than that says 2011 or 2012 is the best buying time frame. We'll see...


Neil

12:59 PM, August 08, 2006  
Blogger bearmaster said...

Neil,

Thank you for your comment contribution! I'm sorry, but you've opened a can of worms! :) Why don't you tell us more? In a weird way it's kind of interesting speculating on what will happen. What do you base your opinions on? You mentioned Thornburg, who else have you read? Do you have any specific book recommendations?

You talked about NRT being reformed. I agree that the real estate industtry will be majorly overhauled, and not just limited to NRT. But I confess I am sceptical it can be done so quickly (next year), because the political force to cause that to happen is typically reactive, not proactive.

The good thing about bear markets is that they knock some sense back into us. When things get this out of whack the market gets efficient, cutting out middle layer bloat, and it innovates new solutions, such as the tiny house.

And now my big question - what would you buy down here in the south bay and what do you expect Southern California society to be like and south bay life to be like while the middle class is busy packing up and leaving?

I don't think we disagree about how bad it can get (but I am an economic grizzly bear), I am just a little sceptical of how quickly change can happen because human bureaucracy is slow machinery. On the other hand, this bubble has lasted a long time. The higher and longer they fly, the harder and faster they can fall. Maybe I will be astounded to see how fast it falls. I think the same thing will happen to stocks. I am not sure which is better, end the pain quickly with a guillotine style market chop, or drag the pain out over years.

This is a discussion I've had many many times with my significant other. If things got really bleak, we figure a decent vehicle, some cell phones, a laptop, some solar cookers, and a few other things could keep us going, without having to pay housing costs. We're also interested in the areas of the country that middle-class Californians have been migrating to.

1:53 PM, August 08, 2006  
Blogger Wannabuy said...

Bearmaster,

This is opening an interesting discussion.

I'm using inputs from multiple sources. Some are conversations with my fiance's brother (in the mortgage industry), Ben Jones' blog, and my own intuition (my job is to take unknown data streams and to try and predict what the heck will happen).

As to the NRT, people I know have been asked to submit resumes back in June for a reformation in 1Q2007! This alone tells me this time around will be much more proactive than the last downturn. I could be wrong... but one doesn't do this unless one things that a bunch of disputed foreclosures will be "plugging up" the economy. In my opinion, the greatest benifit of the NRA is that it forces an undisputed tile/lien situation that allows for the confidence to buy distressed property without odd risks.

I also am going off the esculation in magnitude in frequency we're seeing in all financial markets due to information progation on the web. Partly this is hitting bond investors. I think that one of the biggest things that will happen this time is the speed at which bond investors will tighten credit (e.g., in 2Q2006 Countrywide could only sell off 28% of their option arms to the secondary market) but also the speed with which they will re-release credit (but not for a few years).

I'm also basing my opinions on the 1925 to 1926 Florida real estate market and the Shanghi downturn of a few years ago. They happened quick and then there was a recovery. In my opinion, this is the only way to minimize the pain.

What would I buy? Well... that's up to my fiance' too! We hope to start a family, so school quality will play a big part (e.g., PV). But so will affordability. We both grew up with fruit trees in the yard, so we're willing to pay an non-economic premium for that treat (lot size).

I'm also following all of what I consider the best real time indicators on the economy: restaurants (for the middle class), coffee (for the affluent), and travel. The first two dominoes are falling faster than I thought possible (e.g., look at stock symbols CAKE, EAT, RI, OSI). Yes, Starbucks is still growing, but their competitors cried uncle last quarter. (I look at industries, not just individual companies.)

Now for the hole in my theory that the economy is turning far faster than ever before: hotels and air travel. They're doing incredibly well!

But then I look at rental housing... and the rental rate is way down (according to articles in the WSJ).

****warning, entering speculation zone****
So what I speculate is happening is the affluent are renting out fewer condos/homes for long durations and are instead are flying out for quick trips.

For example, nice Florida condos normally get $12,000 to $13,000 for 3 months rental during the prime season. ($3k to $3.3k a month) Now? People are asking for shorter rentals and are certainly bidding less.

This will have a rapid "trickle down" impact.

But even with this, I'm not expecting that bad a Christmas. People will max out their credit cards and do whatever to stay deep in denial in 2006.

But when the bill arrives in 2007... I expect home sales to stop. If sales stop, prices drop and fast. So far we're hearing pain from a 30% drop in the sales rate.

Here is how I expect the sales rate to drop further:
1) About 1/3rd of the mortgages are 80/20 (usually option ARMs). The Countrywide anouncement tells me that these are no longer palitable to the secondary market. ergo, there goes another chunk of sales.

2) Only the bears right now think that housing won't recover and keep going back up. By October 15th, I belive the general population will *know* homes are going to lose value. Ok, maybe 5% or 10% in their opinion, but they'll know it.

Point #2 drops sales another 33%. Now, this is only a temporary setback. Why? We stop having retires pre-buy their retirement home in advance and instead they will go back to retiring and then buying their retirement homes. 1st time home buyers will take a few more months, etc.


This puts the breaks on the upgrade market. So builders speed up their price drops on the McMansions. This creates forclosures, etc.

By 2Q2007 CNN, MSNBC, etc. will be churning out story after story on the price drops.

Thus, by mid-2008 "joe six pack" will know buying a house is a losing proposition.

Will the price be at the bottom? Nope. But could I buy a home I'd be happy in knowing I could get my money back in 5 years? I think so.

Now you asked is a guillotine better or slow and painfull? I believe a quick hit with a return to investment.

My fiance' and I ahve discussed moving out of state... If its a slow gradual reduction, we'll move to where we can afford. :(

Neil

3:18 PM, August 08, 2006  
Blogger bearmaster said...

Neil, a few things:

Shanghai real estate recovered, but the Chinese economy is extremely dependent on the ever spending American consumer. What will happen to the booming Chinese economy and its recovering estate markets if the American economy goes over the edge? Asset markets have been known to start false recoveries only to sink again...

Clif Droke in his book anticipated a "scary dip" in 2006, a bit of a bounceback in 2007 (probably due to buy-the-dippers thinking housing would bounce back quickly, and ending up getting hammered by falling knives), then a steady drop for several years after.

Suppose we have a vicious bear market and prices are cut, say, 70% in 2008. What will the south bay neighborhood you want to live in then be like? Will you be the lone man in a near deserted ghost town?

From reading Jack Lessinger (Schizomania) and Bob Prechter (Socionomics), I've come to believe that the bear market will force us to rethink what constitutes "value" and "utility" in housing. In other words, a deflationary mindset will lead us to think, "I don't need all this space, I want something smaller." Or, "I can't pay the taxes and electric bills and insurance on this place any more, I need something smaller." Or, "I want to live off the electric grid because I'm tired of all the electricity my house consumes. Why can't I buy a house that can run on power from solar panels?" So the perception as to what is desireable in a house could change. On the other hand, the McMansions of the south bay are built more for the conspicuous overconsumer, and that could go rapidly out of "economic fashion". So what will happen to these McMansions?

Geesh, I wish we could have a "bear gathering". It would be fun to meet other housing bears and talk about these ideas. Talk about books, articles, websites we've seen with relevant information.

BTW, I don't know if you've seen it, but my website has a web page on what life in the real estate bust will be like, and this mainly for amusement (this was published late last year...)

The Bearinator

Your comments are wonderful, please keep them coming!

5:06 PM, August 08, 2006  
Blogger LARenter said...

OK I vote this "best blog post of the day" great conversation guys, you definitely have my head spinning. It does make me wonder of all us bubble heads waiting on the sidelines to jump in when prices correct, how many of us will be able to sustain our incomes during this downturn. I think about this alot.

10:48 PM, August 08, 2006  
Blogger Wannabuy said...

Bearmaster,

Yes, Shanghi did recover, and quickly! But its still a nice example of how it can drop quickly too...

Personally, I do not think certain aspects of the south bay will change:
1) The ocean breezes keeping away the need for air conditioning. :) Ok, I know, only in certain micro climes... Hopefully I can figure out where before I buy! ;)

2) Yes, I think the McMansions with their high utility bills might indeed fall out of favor. Would I buy one? Not the tacky "conspicuous consumption" ones. But maybe a less tacky but large one (that was in one of those sea breeze locations to help cool it...) Maybe its because I have an uncle who refirbished a 1920's era mansion that should have been totally uneconomical... (and was uneconomical, at first) but has turned out through calking, self application of insulation, etc. to be ok.

I do think solar and other energy saving technologies will become more in fashion. :)

If you're asking exactly where I would buy... I don't know yet. I know that I don't want a huge home, but if I could get a 4 bedroom, that would work well (long term). Which zip code? 90277, 90278, 90275, and others are on the radar.

One reason I do not anticipate the bounce that Clif Droke is predicting is the tightening of the credit markets that seem immenent. The "once burned, twice shy" will force a return to moderate down payments (10%+ with higher down payments once again required for the lowest rates). This alone drives too many potential buyers/speculators out of the market to have a big bounce. Some? Sure... enough to counter the mortgage resets coming through by May 2007? Not in my opinion.

The one question is how will the personality of the south bay change. My impression is that many of the "old guard" have already left and that flippers now "own" their homes. This downturn will drive out the flippers and the bling as it did in 1991 though 1996. So for a short time, there will be a trend away from larger homes. But eventually the economy will recover and we'll get back to the normal cycle of homes being 6X to 8X median incomes. But everytime they get to 8X, they drop to 6X... so 10X drops to ???


Ok, bed time. If you would like to have a gathering some time, let me know. Alas, the next two weekends do not work for me (wedding planning or family events).

Is there a way for me to submit my e-mail without anyone but you seeing it? (I do not wish it to be broadcast on the web.)

Neil

12:20 AM, August 09, 2006  
Blogger bearmaster said...

Neil, it looks to me like your email is safe. When I click on your hyperlinked name it takes me to your profile. Sheesh, why didn't you TELL me you had a blog! I will put it on my housing bubble blogs map page on my website.

It sounds like you are busy getting ready for your wedding. Not time to worry about housing - one thing at a time!

6:48 AM, August 09, 2006  
Blogger Wannabuy said...

Bearmaster...

The reason I don't mention my blog is that its almost idle. Not much to write when its a blog about *buying* a home that two years from now. :P

Neil

7:40 AM, August 09, 2006  

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