County of San Bernardino Economic Development Agency

1
County of San BernardinoEconomic Development
Agency

• Housing Challenges Opportunities

• High Desert Housing Fair
• April 19, 2008

George Huang, SBC EDA Economist
2
Current RegionalEconomic Conditions
3
Riverside-San Bernardino AreaAnnual Nonfarm
Employment(Year-over-year change)
Source California Employment Development Dept.
4
Riverside-San Bernardino AreaMonthly Nonfarm
Employment(Year-over-year change)
Source California Employment Development Dept.
5
Southern California Unemployment Rates
Source California Employment Development Dept.
6
Southern California Inflation(Year-over-year
change of CPI-U)
Economic slowdown high inflation?!
Source U.S. Dept. of Labor, Bureau of Labor
Statistics
7
Current Real Estate Situation
8
Some Background

• Riv.-San Bern. metro area has led the State in
  new residential construction every year since
  1992
• Affordability ? strong population growth
• 2000-2005 123,300/year
• 2005-2015 97,900/year (PPIC projections)
• Projections 5 million people by 2016
• Where will we put them all?
• The High Desert will have to absorb a significant
  chunk of the increase

9
Value of Single-Family Residences
Source DataQuick, March 2008 data
10
Recent Developments

• Nationwide housing crisis
• Mortgage resets, mortgage gt value of the house,
  ballooning payments ? foreclosures ? further
  price drops ? more foreclosures (a vicious cycle)
• The number of mortgage interest rate resets will
  finally decline in Q3 2008
• Biggest wave may be yet to come late 08/early
  09?
• Unsold housing ? drastic decline in construction
• Some small builders have gone under and are now
  owned by banks. Banks want them to finish the
  units so they can be sold.
• Credit crunch ? some cant buy even though they
  see great opportunities to buy
• Some sellers if you have pre-approved financing,
  we will take your lower offer

11
San Bernardino CountyResidential Building
Permits Issued
Source Construction Industry Research Board
12
San Bernardino CountyResidential Building
Permits Issued
Source Construction Industry Research Board
13
San Bernardino CountyResidential Building
Permits Issued
Source Construction Industry Research Board
14
San Bernardino CountyMedian Home Sale Price
Source California Association of Realtors
15
San Bernardino CountyMedian Home Sale Price (
Change from Prior Year)
Source California Association of Realtors
16
Year/Year Change inMedian Price of
Single-Family Residences
Source DataQuick, March 2008 data
17
San Bernardino CountyCancellation-to-Sales
Ratiosfor New Housing Projects
Source Ryness Report
18
San Bernardino CountyFirst Supervisorial District
19
Residential Building Permits Issuedin Cities of
1st Supervisorial District
Source Construction Industry Research Board
20
Residential Building Permits Issuedin Cities of
1st Supervisorial District
Source Construction Industry Research Board
21
Residential Building Permits Issuedin Cities of
1st Supervisorial District
Source Construction Industry Research Board
22
2007 Single-Family Home Sales by ZIP Code of 1st
Supervisorial District, part 1
Source DataQuick
23
2007 Single-Family Home Sales by ZIP Code of 1st
Supervisorial District, part 2
Source DataQuick
24
2007 Condo Sales by ZIP Code of 1st
Supervisorial District
Source DataQuick
25
The Housing Crisis Explained
26
2007 Top Metro Area Foreclosure Rates
Source RealtyTrac
27
Sources of the Current Mess

• Irresponsible lenders created artificial demand
  for housing
• Creative financing artificially low payments
  for a short period
• This may work if prices continue to rise and one
  can easily sell the house or re-finance
• Liar loans more artificial demand
• Rising prices induced even more demand for
  housing
• The fear of missing the chance

28
Impact of Creative Financingin Simple Economics

• Sellers sell on the real prices, but buyers who
  got creative financing saw the artificially low
  payments and made the decision based on that
  instead
• Going back to market equilibrium will require
  painful adjustments

Supply of housing
Price of housing
Inflated sales volume
Sellers price
Inflated price level
Normal price level
Buyers payment- inferred price
Impact of creative financing
Demand for home purchases
Qty. of housing
29
Example Loan Amount One Can Afford(A normal
30-year fixed rate mortgage)
30
But If Its Interest-only, You Can Get a Much,
Much Bigger House!
31
Impact of Liar Loansin Simple Economics
Supply of housing

• Stated income or liar loans created
  artificial demand on top of whats already
  distorted by creative financing. These people
  could not even be part of the demand curve
  before

Price of housing
Inflated price level
Normal price level
Impact of liar loans
Demand for home purchases
Qty. of housing
Inflated sales volume
32
Return to EquilibriumCould Be Very Painful

• Foreclosures means units are available at almost
  any price level
• People with ruined credit cant buy for a few
  years
• Worried buyers hesitant to go into the market
• Possible result prices drop deeper than they
  need to be, and then rebound

Supply of housing
Price of housing
Peak price level (sometime in 06)
Normal price level?
Impacts of ruined credit worried
buyers
The Bottom?
Impact of foreclosures
Demand
Qty. of housing
Inflated sales volume
33
Challenges

• Possible path of recovery
• How will it happen? Hard to predict
• Where when is the bottom? No one knows
• The foreclosure dominos effect
• Stopping this will require unorthodox solutions
• Financial firms need to face the reality and
  agree to drastic measures to stop the bleeding
• Credit crunch will ease in coming months
• People are still coming
• Economic development a crucial part of the
  rebound strategy Jobs ? Housing Demand

34
For Existing HomeownersFacing the Tough Decision

• You have options! Find out what they are
• Governments at all levels have programs to help
  (e.g., HUD, YourHome.CA.gov, etc.)
• But beware of some counseling services
• Talk to your lender
• Foreclosure is their last resort too
• There is always room for negotiation
• Compare alternatives before walking away
• How much will your rent payment be?
• Can you buy a cheaper house in one year with your
  ruined credit?

35
Opportunities forFirst-Time Homebuyers

• Not all markets are doing poorly research and
  find the gold nuggets
• More room for negotiations
• Foreclosed properties carry some risks, and so
  dont skip on due diligence
• Prices will rebound in the long run be patient
• Compare house payment to rent
• By 2/08, costs are comparable (for High Desert)
• Also dont forget tax benefits
• Will prices be lower in the coming months?
• Maybe, but no one knows for sure

36
Buy or Rent? Monthly Cost of Housing Comparison
Assumptions 20 downpayment, 1 property tax
included tax benefits not included
Average rent of San Bernardino County, 2007Q4
Source California Association of Realtors
RealFacts estimates by SBC EDA
37
Opportunities for Developers

• Help potential buyers with financing
• Credit crunch is one problem developers can help
  solve
• Multi-family housing
• Lack of suitably supply ? families sharing a
  rental house
• Senior housing
• Trend Age in Place seniors want to avoid
  nursing homes if possible
• Higher-density housing that still conveys a sense
  of independence
• Foreign buyers
• Dropping US -- properties look really cheap
• Some cannot own real properties in their home
  countries, but can own a piece of America.
  Wow!

38
Opportunities for Investors

• Apartment complexes are seen as golden geese
• Good luck finding one for sale ?
• The key is patience
• Prices WILL rebound in due time because demand is
  there

39
Solutions for the Current Mess

• Temporary write-off of loan principals?
• For banks, is a temporary, partial loss better
  than a foreclosure? Probably yes
• Concerns of moral hazard can be offset by
  stricter lending guidelines oversight
• Target owner-occupied housing only, not
  speculators?
• A new Resolution Trust Corporation?
• There are striking similarities between the SL
  crisis and todays mortgage crisis
• A controlled release of foreclosed properties is
  better than an uncontrolled one

40
In Case You Want to Know More

• Go to http//sbcounty.info/downloads to get
• Mortgage Calculator (Excel)
• the impact of putting in extra money each month
• payment amounts for different terms (15-, 20- or
  30-years) and interest rates
• how much you can borrow at different interest
  rates
• DataQuick March 08 data (Google Earth layer)
• Median single-family home prices for So. Cal.
• Price change from a year ago
• This presentation (PowerPoint)
• THANK YOU!