Economic growth has resumed and net job loss has ended in California after a sharp and unprecedented decline in March and April. But despite three consecutive months of solid increases in economic activity and jobs, the state has regained less than one-third (31.1%) of the over 2.6 million jobs lost in March and April.
California employment is expected to drop 7.5% in 2020 compared to a 6.8% decline forecast for the United States. This is a noticeable improvement from our June forecast. The rapid economic reopening and substantial financial support by Federal, state, and local governments has kept more California consumers spending and more businesses out of default than previously thought.
The Federal Reserve has been successful in easing financial conditions allowing many California households to pay down debts and refinance mortgages, while stock prices have moved up to new record highs. But this also highlights continued big downside risks to the California outlook for 2021 should those government supports erode or disappear, election unrest proliferates, financial markets buckle, or a COVID-19 vaccine doesn’t materialize on schedule.
High housing costs have always been a problem for low income households in California but the pandemic has exacerbated the situation as many of the initial job losses directly related to business closures from the pandemic employ low-wage workers, namely leisure & hospitality and other services. While many workers were furloughed and will be recalled once demand returns, 25% of the job losses could become permanent layoffs as more businesses close.
The result could be a rise in loan defaults, evictions, food insecurity, and homelessness – particularly because lower income households typically have fewer assets to cushion a prolonged job loss. A recent extension of the moratorium on renter evictions through January 2021 suggests the potential increase in evictions won’t occur until February of next year.
Notwithstanding recent declines, heretofore unseen levels of unemployment point to a slow and uneven recovery through 2021. California’s unemployment rate reached a record high of 16.4% in April and May and then declined modestly to 13.3% in July. The state’s unemployment rate is expected to remain high and average 10.4% in 2020 and 8.8% next year, well above the U.S. unemployment rate in both years.
Pent-up demand, low mortgage rates and inventories, and a return to positive job growth supported an early rebound in the California housing market in August with existing home sales rising 14.6% from a year ago to the highest level in more than a decade. Consequently, our housing starts forecast for this year has been revised up to a nearly flat -0.3%. Housing starts are projected to rise 17.5% in 2021 on firming demand.
California home prices are projected to increase 5.4% this year and slow to just 2.2% in 2021 as homebuilders respond to stronger demand by building more homes, and more potential sellers are forced to sell. A lack of inventory prior to the pandemic and the unexpected rebound in home sales despite unprecedented unemployment rates are supporting an unexpected acceleration in home prices in California this year.
To learn more, check out the California Economic Outlook.