May 14, 2008

San Jose: One of America’s Recession Proof Cities?

Last week, Yahoo Real Estate ran an article discussing a Forbes study that highlighted 10 American cities that seem to be weathering the recession the best. Texas fared well in this study - with Austin, Houston, Dallas and San Antonio all making the list. Others listed include Salt Lake City, Charlotte NC, Seattle, Raleigh NC, and Oklahoma City OK. Surprisingly - San Jose also made the cut.

The choices were made using three key measures: unemployment data from the U.S. Bureau of Labor Statistics for the year ending February 2008, the BLS data on job growth in non-farm payrolls through February 2008, and median home price data from the National Association of Realtors from the fourth quarter of 2006 to the fourth quarter of 2007. These results were then adjusted using data from a November 2007 report, “U.S. Metro Economies: The Mortgage Crisis,” by the U.S. Conference of Mayors which lists each city’s estimated gross metropolitan product growth by projecting how rising foreclosures and falling home prices would affect overall levels of productivity in local economies.

Texas didn’t experience the rapid growth in home prices seen by California, New York, Florida and other metro regions. It makes sense they would be in better shape, as they are not experiencing the “correction” the rest of us are seeing. All four major Texas cities also show a drop in the unemployment rate. I have noticed that many high tech companies choosing to relocate from California for tax reasons are moving to Texas, particularly to the Austin area. A strong base of technology companies can also be seen in Seattle, and Raleigh, thanks to Microsoft and Cisco Systems.

Should San Jose have made the cut? Although this is my home and I hope for the best in the last half of 2008, I think not. According to Forbes:

“And in the San Jose area, the median home sale price is over $830,000. That’s 11% higher than it was in the fourth quarter of 2006, helping to land the area at No. 4 on our list. Problem is, that growth has since cooled, and it remains to be seen whether pricey homes coupled with a 5.3% unemployment rate will cause trouble for homeowners this year.”

The median home price cited here was based on old data - looking at it with a May 2008 perspective gives new insights. Yahoo Real Estate as of today shows the median home price at $529,900, NOT $830,000. I wonder if Forbes included the surrounding higher priced areas such as Saratoga, Los Gatos, and Cupertino in their study. And according to EconoMagic, the current unemployment rate is 5.5%, not 5.3%. This may not seem significant, but it shows an upward trend.

San Jose’s economy is heavily based on how well local high tech companies are doing, as they employ most of the residents who consume local goods and services. Although Biotech is beginning to blossom in this area, it will take years before these fledging companies employ work forces the size of Intel, Sun Microsystems, HP, eBay, or Yahoo. Outsourcing of engineering functions which followed the manufacturing outsourcing boom has left many who formerly held high level jobs high and dry, and this trend continues.

A better way of assessing how well San Jose will weather the storm would be to check the Silicon Valley 150 report from the San Jose Mercury News daily, and look at the economic strength of the top 150 companies. This data also needs to be tempered with current unemployment rate data as well as foreclosure rate data; some Silicon Valley companies are improving their balance sheets through moving operations off-shore or laying off workers.

Although tech stocks have been moving upwards the past several days, I still contend that a new evaluation with these extra factors included would leave San Jose off the hallowed Forbes list. I still hold out hope that our situation will change - and we will truly earn a position in this list in a few years. For this to happen, our elected officials will have to directly address the mortgage crisis with California-specific solutions, incentivize business to stay here instead of moving to Texas or outsourcing engineering to India or China, and provide REAL housing solutions for those just getting started out in our fair valley.

Until then, rapidly rising gasoline prices (among the highest in the nation), food costs, and the threat of water rationing coupled with an unstable unemployment rate make this a tough place to ride out the storm.

[Photo Credit: Forbes.com]

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