California’s Central Valley Housing Woes Continue

Implications: Affordability ratios are too high, sales are weak, a reduced number of new jobs don't help and wages at the middle and upper levels are not increasing. 

Analysis:

Pests are a way of life in the big agricultural area that is California’s Central Valley. The alarm passes under modern science and farming methods the vast majority of the time, but occasionally the threat brings real economic hurt. You remember the Valley is about 500 miles long north to south by say 100 miles wide. Agricultural enterprise here provides 25% of the nation’s foodstuffs in an over $ 35 billion annual economy. The products range from carrots in the 3 season Bakersfield area, wine and table grapes throughout the region, seasonal produce, stone fruit and nuts, rice, cotton, citrus and all measure of other crops which wind up in the supermarkets and restaurants of this country. The area is super-watered by the flow from the majestic western slopes of the Sierras, and these flows have placed rich soil deposits on the Valley floor. Tourism is a major enterprise with rivers like the Kern in Bakersfield and the American, Sacramento and Russian, National Parks like Yosemite, the Delta water recreational areas and Shasta and other lakes. There are all manner of integrated agricultural firms from machinery producers to packagers and on to service the farms. But other than the activities of the State government in Sacramento in the northern part of the Valley and oil in the Bakersfield area, the Valley is without other major enterprise. The knowledge industry is centered in Silicon Valley which parallels the northern Valley, San Francisco and Los Angeles have the financial service sectors covered and Los Angles possesses the largest manufacturing sector in the country and a huge entertainment industry. The Valley joins the rest of California as a huge magnet for immigrants who find abundant opportunity at the lower income strata.

The housing markets are out of whack. The Valley markets do not receive as much national coverage as Riverside/San Bernardino, Phoenix, Las Vegas and Florida, but that may be due to removal from the major media centers on the California coast. Current income ratios remain in the above 50% area. I don’t yet sense any strengthening of income levels which are needed to bring these ratios down to more workable levels. New construction is difficult with some truly horrendous pricing levels such as $ 315,000/ $ 175 per square foot in Tulare where a more reasonable level might be the prevalent $ 175,000 median. Sacramento is possibly the most startling overpricing in the country, Merced is slow, slow, and slow and Bakersfield is in the midst of working off one of the largest investor activity inventories. Traveling Highway 99, the significant north-south arterial through the Valley, reveals finished lots which appear to be way ahead of production at this time. All said, though, this remains one of the major national markets with enough real and potential volume to warrant major builder offices waiting for balance to return to the affordability ratios. But homebuilding looks more like the business it was, a long-grind, hard-sale business best managed conservatively.

But back to the jobs. There just does not seem to be an attractor for modern knowledge business. UC Merced is open, but it takes an age to build a world-class institution and an ability which makes it necessary for those companies to be nearby. Cal-State Bakersfield, Fresno and Sacramento have not made inroads here, and, to be fair, are probably intended to be pedestrian. There needs to be an unforeseen occurrence which will provide the stimulus. I don’t see a place to peek yet.

So no help here in my opinion and no immediate change forthcoming except price reductions. Best to look elsewhere for bright lights in the housing world.