The Housing Market’s Missing-in-Action
Claudia Oakes calls the house behind hers an “absolute scourge.” Its paint is peeling, its screens are ripped and its welcome mat is dead shrubs and weeds.
But what’s worse is that in a region desperate for affordable housing, it is vacant. Has been for 18 months.
“It’s a terrible loss,” said Oakes, 55. “You know there are people out there who are paying rent and could qualify for this house.”
Between that one and thousands of others like it here and in pockets of Long Beach, Los Angeles, Santa Ana and other areas, Southern California has a far bigger supply of affordable houses than it knows. But for several reasons that have obstructed the laws of supply and demand, they’re not available.
Recapturing run-down houses has become a critical issue across the region. Builders have failed to keep up with the robust job and population growth, in part because communities have clamored against urban sprawl and overcrowding. That makes it even more vital to use existing housing more efficiently, said Stephen Levy, an economist at the Center for Continuing Study of the California Economy.
Nowhere is this irony as poignant as in San Bernardino, a foothill community of 185,000 that is still grappling with the severe economic and housing collapse earlier this decade. And nowhere is the role of housing in determining a city’s fate more obvious.
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Despite improvements in unemployment, crime and poverty, San Bernardino’s streets remain marred by about 1,000 foreclosed houses, almost all owned by the Department of Housing and Urban Development. Many are boarded up and, like the one behind Oakes’ house, nowhere near ready to be sold.
Nine thousand other houses are estimated by city officials to be rentals. The majority are in the hands of out-of-towners, some of whom have not kept up their properties or found good tenants for them, yet are unwilling to give them up.
“It’s a monster issue,” said local economist John Husing. “Our area’s biggest asset is the lower-priced housing, but it’s only an asset if it’s available to people.”
All told, nearly one-third of San Bernardino’s single-family dwellings are rental units. That is the highest non-owner occupancy rate for houses of any major Southern California city, excluding vacation spots, according to real estate research firm Acxiom/DataQuick, which ran an analysis of property tax bills for The Times. San Bernardino also has one of the highest vacancy rates anywhere, at 7%.
Although the high share of rental houses isn’t itself a bad thing, the problem in San Bernardino is that typical home prices are just about the lowest in Southern California--about $81,000 as of July, up just 2.5% from a year ago. That’s less than half the median price for houses in Los Angeles County ($185,000) and a third of the median for Orange County ($237,000).
Granted, many in Southland residents may resist buying in a place such as San Bernardino because of its remote location (about 60 miles east of L.A.) and crime-ridden image. Still, economist Levy said, “that seems like a great opportunity to get a lot of supply back in the market.”
Other cities in the region are also contending with high levels of single-family rentals, especially in neighborhoods with an older housing stock, such as central Ontario, and places that were hit hard by the housing slump, such as Moreno Valley in Riverside County.
Mary Jane Ohlasso, Ontario’s economic development director, said her strategy is to create incentives for first-time home buyers. But that won’t do any good unless investors and others who hold title to these houses are willing to offer them up at a fair price--and the houses are in habitable condition to begin with.
Yet in low-priced markets such as San Bernardino, absentee owners have little incentive to make expensive fixes. It’s a classic problem, said Richard Green, a University of Wisconsin real estate expert.
He said an absentee owner isn’t likely to make the first move to fix a property in a blighted area, thinking, “If everybody else renovates, I get the benefit of the nicer neighborhood, even if I don’t.”
Rents in San Bernardino average about $420 a month, which tend to attract financially shaky tenants. More stable young families that could afford to buy homes in San Bernardino are often dissuaded by the city’s troubled past and lingering poor image.
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Indeed, few cities in America fell as hard as San Bernardino in the last recession. The city has had many booms and busts over the years, beginning in the 1860s with the discovery of gold in nearby Holcomb Valley. In 1976, with its population at just over 100,000, San Bernardino was named an All-America City.
But just two decades later, its three economic pillars came down--Kaiser Steel, Norton Air Force Base and Santa Fe Railroad--and the city was beset by unusually high crime, welfare, foreclosure and jobless rates. Morale dropped so low that its own police force sold T-shirts printed with an image of vultures on the front and these words on the back: “The Murder City.”
The city also was undergoing a more subtle demographic shift in which broad sections of the middle class were retiring or dying, said economist Husing. In many cases, properties were kept by heirs as rentals, or sold to investors who flocked inland in the expectation that prices would rise. That and all the foreclosures set the downward spiral in motion. One neighborhood was lost, then another.
Most of the rentals today are owned by small-time investors who have one or two properties, records indicate. Sixty percent live outside of San Bernardino, said Lee Cagnon, head of the city’s business registration office, which requires landlords of single-family dwellings to register.
Barbara Curran may be a typical local landlord. She owns and rents two houses in the city, both of which she inherited. “I’ve never had any luck with this house,” she said recently, sitting on an inverted bucket at the door of one of her rentals, which was vacant.
She said she had trouble finding good tenants who will take care of the place. Inside, she pointed to a radiator hole in the hardwood floor--a 2-foot-deep pit full of cigarette butts, crayons and other trash.
Curran blames herself too. “To be truthful, I’m never around here. That’s my fault,” she said. But for all the headaches, she said she’s not ready to let go of it. “I’m not going down that road yet,” she said.
Farther from the central city, Fay Farmer owns several houses on Cooley Street and elsewhere, all in tiptop shape, she and area residents say. Farmer lives close by and works the yards herself. She doesn’t want to sell, either.
One big reason: The houses provide good rental income, and the taxes are minimal. Farmer said she’s been renting them practically since the houses were constructed after World War II. She said they were recently appraised at $150,000 apiece. Her taxes, however, are based on assessed values of less than $20,000 for each house, according to property records of three of her houses on Cooley.
Undoubtedly, many other landlords want desperately to unload their rental houses. And, as have homeowners, some investors have walked away from mortgages on which they owe more than the properties are worth; in those cases, selling would carry a tax hit. Others are holding on to their keys, hoping prices will rise again.
That hasn’t happened yet. Sales activity is picking up--but once again, investors are doing much of the buying, a signal that the proportion of rentals will remain high. So far this year, four out of 10 houses sold in the city went to buyers not living there, according to John Karevoll of Acxiom/DataQuick--an even higher share than in the last two years.
Given those dynamics, nobody expects a quick turnaround in San Bernardino, even though the city’s underlying economics are clearly more favorable for change today than perhaps at any other time this decade.
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Unemployment has fallen from double digits to just over 7% in August. Although that’s still high and workers are having to commute to cities such as Ontario, San Bernardino has recruited businesses such as GE Capital, which recently opened a customer service center that created several hundred jobs.
Welfare rolls have fallen from an astonishing 40% of the city’s population in 1994 to 32% last year, according to the county. Crime, too, has dropped, as it has throughout the nation. Earlier this year, the city took extra measures to publicize its selection as one of Smart Choice magazine’s “select cities.” A few years ago, Money magazine had rated San Bernardino the state’s most dangerous city.
“Many things are in place,” said Mayor Judith Valles, who was elected early last year and has helped restore many residents’ faith in the city. Since her arrival, the city has added half a dozen code enforcement officers; complaints from residents and vigorous neighborhood groups have jumped, as have the number of inspections.
“We do a lot more citing,” said police Officer William Flesher as he cruised in a black patrol car through a 2-mile area in the center of the city, where 70% to 80% of the houses are rentals, he said.
Flesher, a 22-year veteran, stopped at a corner on West Orange Street and pointed to a vacant house and a ramshackle garage in the back, which vagrants and gang members had broken into. Flesher said he called the owner, who lives in Los Angeles, and persuaded him to lock the garage, clear out the trash piled inside, replace the broken bay windows and cut the weeds.
The house remains vacant, and its yellowed lawn makes neighbors Felix and Deborah Villa cringe. The Villas recently bought two deteriorating houses across the street and are fixing them up.
“The last few months, it’s changed for the better,” Felix said.
Then there is HUD.
Maggie Pacheko, San Bernardino’s housing director, is counting on a $15-million pilot program in the county, announced two years ago by the housing department, to help convert whole neighborhoods, not a house here or there, by reconditioning houses and making them available for owner occupancy with attractive financing plans.
That money, tied up by bureaucracy, still hasn’t trickled down to the city, but Pacheko expects to launch the program in the next month or two.
Others, though, are skeptical about HUD. The agency holds title to as many as 800 vacant houses in the city, properties transferred to it after owners defaulted on their Federal Housing Administration-guaranteed mortgage loans. About half of these have been put on the market, but Pacheko and many others think the agency won’t be able to sell them because it’s asking too much.
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The red tape is also a problem, said George H. Schnarre, a real estate businessman here since 1964. “If you could open up the pipeline, the problem could be solved,” he said, noting that about 450 HUD houses are on the market today in the city. But between the pricing and the bureaucracy, he asked, who would want to bid on them?
“From a real estate perspective,” he said, “you get to the point where you say, ‘Hey, this is crazy.’ ”
Matt Franklin, special assistant to the FHA commissioner in Washington, argues that those houses are priced appropriately. The big supply of vacant HUD houses in San Bernardino, he said, reflects the region’s unusual housing collapse. He said the pilot program will help resolve that and that it could become a national model.
If that and other efforts by the city work, more renters will become owners, and San Bernardino may be able to rebuild its deteriorated inner-city neighborhoods, schools and quality of life, said Husing, the local economist.
Beyond that, Husing said, San Bernardino’s plentiful supply of low-priced houses could be a godsend for the region.
“The one thing that Southern California families need is inexpensive housing,” he said. “We’ve got it.”
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Not at Home
Although San Bernardino lags the state in employment and income, the inland city’s home prices are among the lowest in California, making home ownership more possible for residents. Yet San Bernardino has the lowest rate of home ownership of any major city in Southern California, largely because of the preponderance of rental houses and vacancies.
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Sources: California Assn. of Realtors, Census Bureau, California Employment Development Department, city of San Bernardino
