The Empire strikes back
DOWNTURNS in the housing market are heartbreaking for homeowners, but they’re also potentially disastrous for everyone else because they can derail economies. As real estate sales decline and prices stagnate, middle-class homeowners stop splurging on designer jeans and dinners out. They stop using their houses like ATMs or even slot machines, taking out loans to pay for cars and electronics. Businesses lose sales. Workers lose jobs. A community (or a region, or a nation) slides toward recession.
Such a housing-related slowdown may already be underway, judging by this week’s economic indicators. Economists blamed real estate for a 7.6% drop in U.S. auto sales, a 0.2% drop in consumer spending (after adjusting for the price of gasoline) and anemic 1.3% GDP growth.
For a sneak peek of what may come to Southern California, keep an eye on the Inland Empire. Gung-ho developers have built acres of new homes east of Los Angeles County over the last decade, making it a haven for middle-class buyers priced out of Los Angeles. But supply is outpacing demand, and many houses are losing value. In March, home sales year over year in Riverside and San Bernardino counties fell 47.3% and 46.6%, respectively, and median prices stayed essentially flat (versus a 6.3% gain in L.A. County). Prices are likely to fall further as developers continue building.
What’s more, more than a quarter of the mortgages originating in the Inland Empire since 2002 have been sub-prime loans, which charge higher-risk borrowers a premium to buy homes. The region has the third-highest foreclosure rate in the U.S.: More than 10,000 mortgages there went into default in the first quarter of this year.
Even as “for sale” signs clutter the landscape, government finance officers and economists say that disaster has yet to strike. Job growth in Riverside and San Bernardino counties slowed to 3.7% in 2006, but that’s still relatively healthy. Sales tax revenues are believed to be flattening but not dropping. Planners have budgeted for lower property tax growth, but they don’t anticipate slashing government jobs or curtailing improvement projects.
Hopefully they are right. But if they’re wrong, the Inland Empire’s experience might prove a cautionary tale about where we’re all headed.
