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in concentrated areas as mortgage delinquencies rose. The market was soon flooded with properties of delinquent owners, further compounding the situation and triggering greater home price depreciation.
Page 25 Home Prices Figure 3: Home Prices in California, Greater Los Angeles, San Bernardino County and Riverside County, 2002-2010
Figure 2: Housing Affordability Index, 1988-2010, California, Greater Los Angeles, and the Inland Empire
During the fifteen years preceding the housing market crash in 2006, the Inland Empire’s Affordability Index, a statistic compiled by the California Association of Realtors (CAR) measuring the percentage of families capable of affording a median home in the area, plummeted from the stable 50% levels of the late 1990s and early 2000s to 16% in 2006, its lowest point in 18 years. The Inland Empire’s rising per-capita income could not keep up with its quickly escalating home prices, and it showed steeper declines in affordability relative to its neighbors, notably the Greater Los Angeles area. Later, the fall in house prices resulting from overbuilding and increased foreclosures contributed to all-time high housing affordability levels; the CAR climbed to 69 for San Bernardino and 63 for Riverside in 2010. Unfortunately the underlying story behind the affordability data is more complicated than price and income movements might suggest. Mortgage rates also play a significant role, since the vast majority of buyers require a mortgage loan in order to purchase a house. The CAR pegs mortgage rates in a particular area to the national average of all fixed and adjustable mortgage rates. As a result, a CAR index higher than the California average is an indicator of a region with a lower overall credit standard than the California average. As of the fourth quarter of 2010, the CAR index for the Inland Empire stood at 64 compared to the California average of 50. This 14-point differential indicates that, on average, the Inland Empire has lower credit ratings, lower per-capita income, and consequently, higher rates than the California average. This means that Inland Empire homeowners pay a higher interest rate for their mortgages, reducing the underlying value of homes in the area.
Perhaps the most visible and accessible measure of housing market performance is home sales price. In many areas of the country, prices skyrocketed during the housing bubble, but few counties showed such extremes as San Bernardino County and Riverside County. Fueled by bullish housing speculation and aggressive lending practices, home prices in San Bernardino and Riverside Counties soared nearly 124 percent from 2002 to 2007 on the Conventional Mortgage Home Price Index (CMHPI). This was the third largest spike in the nation behind Bakersfield, CA (127 percent) and Miami Beach, FL (126 percent). Compared to 2002 levels, prices in both San Bernardino County and Riverside County easily climbed higher in terms of percentage growth and subsequently experienced a larger decline than the Greater Los Angeles area or, indeed, California as a whole. Furthermore, housing prices in the two counties showed greater price volatility than the Greater Los Angeles Area. This difference in price levels and volatility is typical of what is developing into an East-West divide, rather than the traditional North-South divide, in California. It appears that prices have reached bottom, and are firming now, as investors have entered the market and absorbed some of the inventory through cashflow investments. However, the absence of a strong recovery in the Inland Empire underscores the uncertainty in the market and gives developers mixed signals, especially regarding the potential and timeframe to undertake new construction. Housing Permits, Starts, and Foreclosures One of the most important indicators of a real estate market’s health is the measure of new construction activity. It is well known, for example, that housing start levels and changes in housing starts are leading indicators of general economic conditions. The number of housing permits issued on a countywide basis is a proxy for housing starts. Figure 4 shows seasonally adjusted permits in San Bernardino County and Riverside County, taking into account changes in population. Demand for new construction has two main components: speculative non-owner occupied housing and owner-occupied housing. Speculative development often outnumbers the more individual, owner-driven construction, and therefore serves as an indicator of the market’s long-term momentum. I nland E mpireoutloo k . com | 2 5