This section complements the analysis of the Southern California housing market and provides some more specific details about the housing market in the California Inland Empire, here for simplicity defined as the counties of Riverside and San Bernardino. Since numerous references are made to the Southern California housing market, it is recommended to read the section on Southern California before continuing.
The Inland Empire housing bubble has been even more pronounced than the one in most other regions in Southern California. The implications drawn in the analysis of Southern California as a whole are thus expected to be even more severe in the Inland Empire: The more dramatic swings in perceived housing wealth leave businesses, banks, politicians and consumers even more vulnerable to losses in consumption, mortgages, tax revenues and, of course, housing wealth.
But even within the Inland Empire, there have been locations that were more and others that were less affected. As before, businesses may use the maps and analysis to learn more about changes in their customer base, politicians in their tax base, current homeowners in their wealth situation and prospective home owners may be guided to a more attractive location within the Inland Empire.
As in the previous section, we will provide information with six indicators calculated per square-mile. Again, all of these are calculated based on single family home transactions only:
- Price development
- Housing unit turnover
- Equity at time of purchase
- Consumption possibilities out of housing wealth
- Property tax income as determined at the time of purchase
- Mortgage default risk
Each stakeholder can use the maps and animations, find their location and obtain a picture of how her or his individual neighborhood has fared so far. Home owners will likely be interested in information provided in sections 1, 2 and 6, politicians in 2, 5, and 6, banks in 1, 2, 3,4 and 6, and other small businesses in 1, 2, 4 and 6.
Price Development in Southern California
The Inland Empire has experienced an even more dramatic development of house prices than Southern California overall with some neighborhoods seeing average real single family home sale prices (adjusted for inflation) quadruple in as little as seven years. What has been true for Southern California overall is also true for the Inland Empire: This development was by no means uniform and some neighborhoods substantially rose more than others, and sometimes neighborhoods with dramatically rising home prices were located right next to those whose prices only rose moderately (see map below). The same has not quite held true during the downturn: The neighborhoods that preserved their value the best were with few exceptions geographically separated from the neighborhoods that suffered the largest declines. Some likely reasons for this development are explained in the slide show Anatomy of a housing crash. The neighborhoods that saw the highest price increases have not (yet) also seen the largest declines, and similarly for the neighborhoods with the lowest increases. This already indicates that a substantial redistribution of housing wealth has taken place in the Inland Empire.
Housing Unit Turnover
Recall that we proxy housing turnover with the number of transactions from 1998 to 2008 relative to the number of housing units in the year 2000. Consequently, the map that indicates cumulative turnover (see map: Cumulative Turnover) needs to be interpreted with some care. Many of the housing units that saw the largest turnover (indicated in red) have been built during the bubble period, so the number of housing units in the base period was relatively low, and consequently a large number of units have been sold in those neighborhoods relative to the base year 2000. But even in the older settlements, turnover rates have been quite high, indicating substantial neighborhood instability. With foreclosures mounting, some of these neighborhoods will definitely see even higher turnover and lower stability.
Equity at Time of Purchase
Housing equity in the Inland Empire has dramatically been eroded during the downturn. If home owners default on their mortgage, this implies that banks may not be able to recover the full mortgage amount and administrative costs. The following map displays the average down payment as a share of the house price at the time of the transaction in 2006. Two features stand out: First, neighborhoods with high equity shares cluster together. The same is true for neighborhoods with low equity. This is good news for banks that operate locally and only have customers in high equity share neighborhoods – but bad news, of course, for those who predominantly operate in clusters with low equity shares. Clearly, neighborhoods with low equity shares on average are a lot more vulnerable. Second, there are substantial clusters that exhibit negative equity at the time of purchase. Note that this map is a snapshot at the height of the bubble. Consequently, properties with negative or low equity at the height of the bubble are now what is commonly referred to as “underwater”: the mortgage amount on each of those houses is higher than its market value.
Consumption Possibilities out of Housing Wealth
The decrease in perceived housing wealth and its potential to reduce consumption possibilities in itself hurts consumers. However, if the largest decreases happened to relatively affluent, the overall effects might not be as dramatic. However, it turns out that, if anything, the opposite is the case. The map (largest decliners by income) shows that a large proportion of the largest declines in average home values happened in lower income neighborhoods. Adding the best preservers into this map (largest declines and best preservers by income) reveals that many of the neighborhoods that best preserved their value happened to be more affluent, and only relatively few lower income neighborhoods were amongst those that preserved their value well. Those households may consequently be even harder impacted by loss of consumption possibilities than the average effect may indicate. The implications are twofold: since more affluent households consume more in absolute amounts, the total effect on the economy might be less. However, the disproportionate welfare loss for the less affluent may likely cause substantial social problems in the medium run.
Property Tax Income as Determined at the Time of Purchase
The Inland Empire once more has been at least as hard hit by property tax decreases as Southern California, if not more. In some areas, average property taxes of newly sold homes have more than halved on average from the peak to the third quarter of 2008, the last quarter under consideration in this study (See maps below). As long as house prices fall, this trend will continue with all the implications outlined in the previous section. In short, Inland Empire cities and counties will have to tighten their belts even more than the rest of Southern California, unless other funding sources are made available.
The maps from the previous section (see below) offer some unpleasant prospects for the Inland Empire. Note that in Section 3 we considered down payments at the time of purchase, while the two maps in this section are based on cumulative equity: the down-payment plus any additions or subtractions to the value due to house value increases or losses since the purchase, but not including any additional borrowing against home equity increases. Recall that for the coefficient of variation map (see map: Coefficient of Variation) light green areas are the safest, while red and especially orange neighborhoods are at risk. In the skewness of negative equity map (see map: Skewness of negative equity), dark green areas are the relatively safest, while red areas are the most likely to see defaults in the future. According to those measures, the Inland Empire still constitutes the highest risk area for future foreclosures, thus home price drops with all its negative consequences are likely to haunt the Inland Empire even more than other locations in Southern California.
By all measures analyzed in this section, it seems that the Inland Empire will likely underperform any California-wide economic development. This will be the case as long as the link between the housing market and the real economy is substantial enough to pull down the local economy.
Data-sources: ACS, Census, ESRI, Dataquick