Insight From a Hard-Hit Homebuilding Market

Riverside-San Bernardino, home of the Inland Empire, is facing a harsh reality of market conditions.

With home prices more than doubling from 2001 to 2006, housing costs reached an all-time high one year ago, when purchasing a median-price detached home would have eaten up 69 percent of the median income (assuming an 80 percent LTV fixed-rate mortgage and the 20 percent down payment amortized over 7 years).

At 64 percent of income today, housing costs in Riverside—San Bernardino make it the most expensive (in relation to income) place to live in the country that does not abut the Pacific or Atlantic oceans or San Francisco Bay.

What is most significant about the Inland Empire's non-coastal location is that it is not supply-constrained. Places like San Francisco, New York and Miami are very expensive places to live partially because there is so little housing built each year. This is not the case in Riverside-San Bernardino, where more than 51,000 building permits were issued in both 2004 and 2005.

Although permits have slowed, the number of new-home communities continues to grow. The 640-plus actively selling new home communities in the region today represent a 55 percent increase from just three years ago and a 10 percent increase from just one year ago. With such a large amount of new-home supply for sale at once, competition is fierce. To add insult to injury, there are more than 60,000 resale homes for sale, which is a 13-month supply.

The Inland Empire will probably be the hardest-hit market by the blowup in the mortgage industry for several reasons:

• PRICE — With a median detached resale home price of $382,500, a huge percentage of the homes in the region have mortgages that exceed the conforming loan limit, which means that Freddie Mac and Fannie Mae were not willing to purchase the loans in the first place, and borrowers flocked to aggressive, adjustable-rate loan programs.
• FHA BAILOUT — For the same reasons, most of the homes are above the FHA price limits that the government is proposing to bail out troubled homeowners.
• LACK OF DOWN PAYMENT — More than 50 percent of 2006 home purchases in most zip codes involved no down payment.
• INVESTORS — Investors were also prevalent in this market, particularly in the Coachella Valley/Palm Springs area, where more than 16,000 permits were issued over a two-year period and very little employment exists other than retail and tourism.
• FORECLOSURES — We are already seeing a number of bank-owned properties for sale in the market, and there is already one notice of default filed for every 2.2 homes closed.

Job growth in the region remains solid and is likely to remain strong for years to come, yet the preponderance of new jobs are low-paying jobs, particularly in warehousing and distribution. Of the nearly 45,000 payroll jobs created over the last year, only 23 percent fit into categories that we consider to be high-paying.

This market won't stabilize until housing costs return to normal levels of income and the supply of both resale listings and actively-selling new home communities falls by more than 50 percent. Some extraordinary event will be needed for this stabilization to occur before 2011.