The County is coping with very difficult economic times. The problems in the mortgage sector have led to a full credit crunch that is suffocating many businesses. Because of the difficulty in pricing their assets for sale, their reduced ability to raise funds and their need to preserve cash, the banks are unwilling or unable to lend money. The result is widespread devastation in sectors that rely heavily on consumer and gap financing. Many auto dealers have failed not because of a collapse in demand but because of the inability of prospective buyers to obtain financing to complete the purchase.
Meanwhile, the turmoil in real estate continues. The "first wave" of foreclosures came from adjustable rate mortgages (ARMs) resetting to much higher interest rates. As these homeowners were forced out of their homes, this helped deflate the real estate bubble. As prices continued to drop, they caused the "second wave" of foreclosures caused by upside-down mortgages. Many of these homeowners had taken large cash-out mortgages and their loan-to-value ratio soon exceeded 100% by a large margin. Even if the homeowners could afford the mortgages, some voluntarily walked away. Thanks in part to these foreclosures, the economy continued to decline and thereby creating the "third wave" of foreclosures -- unemployed homeowners incapable of paying their mortgages. Unless the economy recovers soon, we will see more foreclosures as a result of the "third wave" and the governments' options to stop this tsunami of foreclosures are very limited.
The preliminary December 2008 unemployment rate
for the
County was 9.7%, 3.5 percentage points higher than in December 2007. This is the highest rate since January
1994. In December, approximately 88,400
County residents reported being unemployed, a 61% increase from a year
ago. The labor force of
The two-county Riverside-San Bernardino metro
area has led
the State in job growth for many years.
During the 2001-2006 period, the two-county area accounted for
nearly
half of the total job growth in the State.
The region, along with the
Total employment in the two-county metro area was estimated at 1.25 million at year-end 2008, which is 38,400 jobs or 3.0% below the year-ago level. That level is also 3.8% below the all-time peak employment level recorded in June 2007. Construction was the sector with the largest job losses in both numerical and percentage terms. Compared to its peak in June 2006, construction employment was down by 44,800 or 33.8%. With the large inventory of foreclosed houses on the market, new home construction will not see a strong recovery until 2011 at the earliest. Manufacturing was down by 18,600 jobs or 14.8%. Retail trade was down by 15,200 or 8.2%. Employment in financial activities, which include banks and real estate, was down by 6,100 or 11.7%.
Both
The "housing rush" finally ended in 2007. Median home resale prices, which had tripled between 2000 and 2006, reached its peak in November 2006. According to DataQuick, the median single-family home resale price for December 2008 was $180,000 or 52.6% below the November 2006 level. Foreclosed properties account for an estimated two-thirds of all housing sales in the County. Yet some prospective homebuyers are still hesitant to act because they expect further price declines. Those who want to buy, but have less-than-perfect credit history, have difficulties obtaining financing due to the overly tightened credit markets.
The number of foreclosures has spiked in recent
months. During the fourth quarter of
2008,
Some foreclosures are "voluntary" – homeowners walking away from houses whose values have dropped below the existing loan amounts. Some are "involuntary" – homeowners can no longer afford the payments because of economic hardship or readjustment of interest rates. Regardless of the cause, foreclosures put further downward pressure on home prices across the region. With so many foreclosed properties on the market, sales of newly built homes have plummeted. Some builders fail to complete or choose to abandon their projects, leaving their financiers with half-built houses.
Problems in housing have affected many parts of the local economy beyond the housing sector. County governments are concerned about the fiscal impact of lower property tax revenue from fewer sales, foreclosures, lower assessment increases (below the 2% allowed by Prop 13), and even re-assessments (mandated by Prop 8; largely isolated to properties sold in the past five years). Lower home sales are also hitting the home improvement, furnishings, and appliance stores brutally.
The current housing crisis has hit the
The foreclosure cycle has affected the quality of life for local residents in many ways. Every foreclosed house drags down the property values of other houses in the neighborhood. Some homeowners trash the house they once loved to the point that it cannot be sold without massive repairs. Unmaintained properties become breeding grounds of vandalism, crime, and even mosquitoes. Some sellers have to take steep losses just to dispose of units that are far below normal standards (and the County gets lower property tax revenue for years because of this). As home values continue to drop, more mortgages become upside-down and more owners are tempted to walk away. It has now become a vicious cycle that's difficult to stop.
On the other hand, rapid commercial and retail
development
in the past decade has improved the quality of life of local residents. The
While most of media's attention has been on the housing crisis, the nonresidential sector is experiencing a major downturn no less drastic in magnitude. Office construction, the harbinger of the region's shift to white-collar industries, posted the first year-over-year decline in 2008. The total value of new office building permits issued in 2008 was just $33.2 million, down 71.8% from 2007. There were two months in 2008, September and December, when no permits were issued. Why the lack of construction? First of all, vacancy rates are nearly double the year-ago level. 2008Q4 vacancy rate of 20.6% was the highest in ten years. Second, construction loans are very hard to come by nowadays thanks to the credit crunch. Finally, the sharp drop in demand has led to a decrease in asking rents and a abrupt increase in vacancy rates, and this has led to concerns over the revenue stream of the developers and their ability to pay back the loans. A few office buildings are on the market at prices below their original construction cost -- a sign of desperation of the owners to raise cash.
Industrial construction has traditionally been
strong
because of the displacement of manufacturing and logistics industries
from the
coastal counties. The annual average of
the value of industrial building permits issued between 1998 and 2007
was $325
million. But in 2008, industrial
construction took an immediate downturn.
The 2008 total was just $92 million, or a 73.7% decline from
2007's $351
million. Just like office construction,
no industrial construction permits were issued in September and
December of
2008. For October and November of 2008,
the values of permits issued were under $1 million each.
During the peak year of 2004, the monthly
average was $36 million. Vacancy rates
reached 9.9% in 2008Q4, the highest rate in 14 years and more than
double the
year-ago rate of 4.8%. Part of the
problem that hit the industrial real estate sector was the dramatic
slowdown in
trade-related logistics. Port traffic at
the ports of LA and
Retail construction has been strong in recent
years thanks
to the strong population growth in the County, but the boom times are
over. The retail construction sector
experienced a very sharp turn late in 2008.
For 2008, the annual total of retail building permits issued was
$243
million, a 30.6% decline from 2007. For
the first time in nearly three years, the monthly totals were below the
$10
million mark for each of the last three months of 2008.
Many retailers have announced store closures
or even liquidation during the second half of 2008, and the relatively
sudden
release of real estate by these firms will hit the retail market really
hard
during the first half of 2009. Large
local retailers with announced or completed store closures include
Mervyns,
The severe economic downturn that hit the globe has forced the four departments of the Economic Development Agency to refocus their efforts. The Department of Community Development and Housing now administers HUD's Neighborhood Stabilization Program (NSP) on behalf of a large portion of the County. NSP is the largest program to help mitigate the impacts of foreclosures. The Department of Workforce Development has received additional funding to help laid-off workers with transitional assistance. The department also partners with private service providers to hold workshops to help businesses avoid distress and failure. The Department of Economic Development now focuses more on retaining existing businesses instead of attracting new businesses. Even the Redevelopment Agency has to contend with the foreclosures within its service areas instead of just pushing for more developments. The EDA will strive to serve the current needs of the County residents while looking out for opportunities to promote future growth.