The latest estimates from the California Employment Development Department (EDD) indicated a decline in San Diego employment between December 2009 and January 2010.  But there is always a decline in employment between December and January, and as a matter of fact, this January's decline was estimated to be substantially smaller than usual.

And that's where it gets weird.

You see, every March, the EDD (with help from the Bureau of Labor Statistics) revises the prior years' job numbers based on new and more thorough data.  This time around, they revised 2009 San Diego employment downward by quite a bit.

Let's take December 2009 as an example.  The EDD's initial estimate for San Diego non-farm employment in December, initially released in January, was 1,248,400 jobs.  The revised December 2009 estimate released yesterday was 1,218,800 jobs.  The newer estimate was lower by 29,600 jobs or 2.4%.

OK, so, employment is a difficult thing to estimate, and they got new data that gave them a better read on things.  They revised the data accordingly.  So far so good.

The weird part is that the January 2010 data seems strangely positive given the serious downward revision to the data as recent as the prior month.

For example, San Diego employment between December 2009 and January 2010 was estimated to have dropped by 1.4 percent.  But like I said, employment always drops in January.  In the prior five years, the average December-to-January decline was 2.4 percent.  It seems strange that this particular January would have had such an unusually mild decline given the severe downward revisions for 2009.

This same strange dichotomy can also be seen in the accompanying chart of year-over-year job declines.  The annual rate of job loss is cruising along in the range of 70,000 to 80,000 jobs, then suddenly collapses to 50,000 jobs in January.

OK, one more example, this time looking at an individual sector.  Between December 2008 and December 2009, the revised numbers show that employment in the retail sector had dropped by 12,100 jobs.  But between January 2009 and January 2010 (just a month later), the same sector is estimated to have shrunk by only 6,300 jobs.

All this data suggests a very rapid improvement in job conditions in January.  But while it's possible that the situation could improve that fast, it seems very unlikely that it would do so in a single month after the EDD had just realized that their prior months' estimates were far too optimistic.

Some combination of factors caused the EDD to make their preliminary estimates too optimistic in late 2009.  Isn't it possible that the same factors are still in place and causing them to be too optimistic in their preliminary estimate for January?

I actually talked to someone at the EDD about this, and while she said that the January number was calculated before the 2009 revisions were made (which lends credence to the prior paragraph), she didn't have too much insight to offer on this question.

In short, the preliminary estimates make it look like there was some serious improvement in San Diego job conditions last month.  But the nature of the 2009 revisions throw that conclusion into question, to put it mildly. 

As much as it would be nice to believe that things were improving so fast, I expect that the January numbers will be revised down in the future.  The rate of job loss is probably slowing as it has been since mid-2009, but it seems unlikely that it is slowing anywhere near as much as the latest data suggests.

-- RICH TOSCANO

The median price per square foot of existing homes sold in San Diego bounced a bit last month -- by 1.1 percent, to be exact.  But this is a smaller amount than the median had fallen the prior month.  So prices by this measure have continued their late-2009 trend of bouncing along and going nowhere.

Looking back a full year, to put that in perspective, prices have definitely gone somewhere.  This can be easily seen on the accompanying graph.  Between February 2009 and February 2010, the median price per square foot rose 11.5 percent for single family homes, 20.4% for condos (which are much more volatile primarily due to a smaller data set), and 13.8 percent for a volume-weighted aggregate of the two property types. 

The bulk of that rebound took place in the seasonally strong six-month period between April and September.  Since then, prices have pretty much gone nowhere -- a trend (such as it is) that continued last month.  The seasonally strong period approaches again.  But so does the date when the Fed will allegedly stop directly propping up the mortgage market.  So we'll just have to wait and see how that all works out.

-- RICH TOSCANO

A couple of interesting bailout-related items crossed my desk today.  I have given up on trying to keep track of all the bailouts, but these both relate directly to our beloved topic of shadow inventory so I thought I'd note them.

First, the White House is trying to ban any foreclosure unless the loan in question has been screened for HAMP, the government's flavor-of-the-month home loan modification program.  As I understand it, HAMP has been fairly useless, for reasons I will describe below.  But no matter -- an extra mandatory step to screen every mortgage for eligibility will further delay the foreclosure process, perhaps resulting in even more delinquent mortgages remaining in pre-foreclosure limbo.

The reason that HAMP and the government's other varied foreclosure prevention schemes haven't made much of a splash is that they don't address the main cause of foreclosures: that many homeowners owe more than their homes are worth.  (Though I suppose the term "homeowner" is a bit of a misnomer in these cases).  If someone owes significantly more than a home is worth, regardless of how low you temporarily get their payments, they still just don't have much incentive to stay in the home and remain under the burden of that giant debt load.  That is why the government's efforts to stop foreclosures have largely failed.

So I was very interested to read that the FDIC is going to use its failed banks as guinea pigs to, per the Washington Post, "test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure."

Do you really need to test that premise?  Apparently so.

Widespread mortgage principal reductions for underwater owners are the nuclear option in the government's effort to bail out the housing market.  That would be the one surefire way to take away underwater homeowners' incentives to walk.

Such an effort would in the majority of cases consist of reimbursing people for poor investment decisions just because the investment in question happens to be a politically favored one.  But the government has already spent untold sums rewarding the horrific investment decisions of banks and their bondholders -- it shouldn't be too surprising that they would throw the same bone to bubble-era home buyers too.

I suspect that principal reductions are on the way.  The FDIC's "test" certainly suggests as such.  And this is why I think it's too early to tell whether shadow inventory or the vaunted "second wave" of foreclosures will ever actually amount to anything.

-- RICH TOSCANO

I haven't focused on new foreclosure activity for a while because the topic has become somewhat irrelevant, analytically speaking.  The question is not whether a large "shadow inventory" of foreclosed homes exists -- it does -- but whether and over what timeframe that inventory will actually become relevant by entering the market.   That being the case, the question of how fast the shadow inventory might be growing isn't terribly high on my list of compelling topics.

It is nonetheless at least mildly interesting to note that new foreclosures, as measured by mortgage default notices, have slowed substantially.  They are still significantly higher than they ever got before the current bust, but the accompanying graph shows that default notices have been dropping in a fairly steady manner for almost a year now.

It could be that fewer borrowers are unable (or unwilling) to pay their mortgages, but that is not necessarily the case.  There are numerous anecdotal tales of people who have long since stopped paying their mortgages but haven't gotten a notice of default yet.  It could just be that lenders are letting things slide to push off foreclosure for a while until they see what comes down the bailout pike.  Also, short sales, which allow borrowers to avoid foreclosure by selling their homes for less than the mortgage amount, are quite common and could be heading off a lot of outright foreclosures.

Whatever reason, the number of homes officially entering the foreclosure process has declined steadily and significantly since early 2009.

-- RICH TOSCANO

The latest estimates from the California Employment Development Department (EDD) indicated a decline in San Diego employment between December 2009 and January 2010.  But there is always a decline in employment between December and January, and as a matter of fact, this January's decline was estimated to be substantially smaller than usual.

And that's where it gets weird.

You see, every March, the EDD (with help from the Bureau of Labor Statistics) revises the prior years' job numbers based on new and more thorough data.  This time around, they revised 2009 San Diego employment downward by quite a bit.

Let's take December 2009 as an example.  The EDD's initial estimate for San Diego non-farm employment in December, initially released in January, was 1,248,400 jobs.  The revised December 2009 estimate released yesterday was 1,218,800 jobs.  The newer estimate was lower by 29,600 jobs or 2.4%.

OK, so, employment is a difficult thing to estimate, and they got new data that gave them a better read on things.  They revised the data accordingly.  So far so good.

The weird part is that the January 2010 data seems strangely positive given the serious downward revision to the data as recent as the prior month.

For example, San Diego employment between December 2009 and January 2010 was estimated to have dropped by 1.4 percent.  But like I said, employment always drops in January.  In the prior five years, the average December-to-January decline was 2.4 percent.  It seems strange that this particular January would have had such an unusually mild decline given the severe downward revisions for 2009.

This same strange dichotomy can also be seen in the accompanying chart of year-over-year job declines.  The annual rate of job loss is cruising along in the range of 70,000 to 80,000 jobs, then suddenly collapses to 50,000 jobs in January.

OK, one more example, this time looking at an individual sector.  Between December 2008 and December 2009, the revised numbers show that employment in the retail sector had dropped by 12,100 jobs.  But between January 2009 and January 2010 (just a month later), the same sector is estimated to have shrunk by only 6,300 jobs.

All this data suggests a very rapid improvement in job conditions in January.  But while it's possible that the situation could improve that fast, it seems very unlikely that it would do so in a single month after the EDD had just realized that their prior months' estimates were far too optimistic.

Some combination of factors caused the EDD to make their preliminary estimates too optimistic in late 2009.  Isn't it possible that the same factors are still in place and causing them to be too optimistic in their preliminary estimate for January?

I actually talked to someone at the EDD about this, and while she said that the January number was calculated before the 2009 revisions were made (which lends credence to the prior paragraph), she didn't have too much insight to offer on this question.

In short, the preliminary estimates make it look like there was some serious improvement in San Diego job conditions last month.  But the nature of the 2009 revisions throw that conclusion into question, to put it mildly. 

As much as it would be nice to believe that things were improving so fast, I expect that the January numbers will be revised down in the future.  The rate of job loss is probably slowing as it has been since mid-2009, but it seems unlikely that it is slowing anywhere near as much as the latest data suggests.

-- RICH TOSCANO

The median price per square foot of existing homes sold in San Diego bounced a bit last month -- by 1.1 percent, to be exact.  But this is a smaller amount than the median had fallen the prior month.  So prices by this measure have continued their late-2009 trend of bouncing along and going nowhere.

Looking back a full year, to put that in perspective, prices have definitely gone somewhere.  This can be easily seen on the accompanying graph.  Between February 2009 and February 2010, the median price per square foot rose 11.5 percent for single family homes, 20.4% for condos (which are much more volatile primarily due to a smaller data set), and 13.8 percent for a volume-weighted aggregate of the two property types. 

The bulk of that rebound took place in the seasonally strong six-month period between April and September.  Since then, prices have pretty much gone nowhere -- a trend (such as it is) that continued last month.  The seasonally strong period approaches again.  But so does the date when the Fed will allegedly stop directly propping up the mortgage market.  So we'll just have to wait and see how that all works out.

-- RICH TOSCANO

A couple of interesting bailout-related items crossed my desk today.  I have given up on trying to keep track of all the bailouts, but these both relate directly to our beloved topic of shadow inventory so I thought I'd note them.

First, the White House is trying to ban any foreclosure unless the loan in question has been screened for HAMP, the government's flavor-of-the-month home loan modification program.  As I understand it, HAMP has been fairly useless, for reasons I will describe below.  But no matter -- an extra mandatory step to screen every mortgage for eligibility will further delay the foreclosure process, perhaps resulting in even more delinquent mortgages remaining in pre-foreclosure limbo.

The reason that HAMP and the government's other varied foreclosure prevention schemes haven't made much of a splash is that they don't address the main cause of foreclosures: that many homeowners owe more than their homes are worth.  (Though I suppose the term "homeowner" is a bit of a misnomer in these cases).  If someone owes significantly more than a home is worth, regardless of how low you temporarily get their payments, they still just don't have much incentive to stay in the home and remain under the burden of that giant debt load.  That is why the government's efforts to stop foreclosures have largely failed.

So I was very interested to read that the FDIC is going to use its failed banks as guinea pigs to, per the Washington Post, "test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure."

Do you really need to test that premise?  Apparently so.

Widespread mortgage principal reductions for underwater owners are the nuclear option in the government's effort to bail out the housing market.  That would be the one surefire way to take away underwater homeowners' incentives to walk.

Such an effort would in the majority of cases consist of reimbursing people for poor investment decisions just because the investment in question happens to be a politically favored one.  But the government has already spent untold sums rewarding the horrific investment decisions of banks and their bondholders -- it shouldn't be too surprising that they would throw the same bone to bubble-era home buyers too.

I suspect that principal reductions are on the way.  The FDIC's "test" certainly suggests as such.  And this is why I think it's too early to tell whether shadow inventory or the vaunted "second wave" of foreclosures will ever actually amount to anything.

-- RICH TOSCANO

I haven't focused on new foreclosure activity for a while because the topic has become somewhat irrelevant, analytically speaking.  The question is not whether a large "shadow inventory" of foreclosed homes exists -- it does -- but whether and over what timeframe that inventory will actually become relevant by entering the market.   That being the case, the question of how fast the shadow inventory might be growing isn't terribly high on my list of compelling topics.

It is nonetheless at least mildly interesting to note that new foreclosures, as measured by mortgage default notices, have slowed substantially.  They are still significantly higher than they ever got before the current bust, but the accompanying graph shows that default notices have been dropping in a fairly steady manner for almost a year now.

It could be that fewer borrowers are unable (or unwilling) to pay their mortgages, but that is not necessarily the case.  There are numerous anecdotal tales of people who have long since stopped paying their mortgages but haven't gotten a notice of default yet.  It could just be that lenders are letting things slide to push off foreclosure for a while until they see what comes down the bailout pike.  Also, short sales, which allow borrowers to avoid foreclosure by selling their homes for less than the mortgage amount, are quite common and could be heading off a lot of outright foreclosures.

Whatever reason, the number of homes officially entering the foreclosure process has declined steadily and significantly since early 2009.

-- RICH TOSCANO