Economist John Husing #382


Bruce Norris is joined this week by Dr. John Husing. Dr. Husing is the leading authority on the Inland Empire’s economy, and he has been studying since he wrote his doctoral thesis on the region in the 1960s. His influence on the business and political landscape has been so extensive that the Los Angeles Times named him one of the 100 most powerful people in Southern California in 2006. He is a writer of the Quarterly Economic Report, an economic newsletter now in its 20th year. His company, Economics and Politics, Inc. provides consulting services for municipalities and counties with economic strategies, statistical data packages, recommendations for public policy and briefing presentations to businesses and political leaders about the nature, growth, and economic trends of Southern California. Dr. Husing’s website includes copies of his newsletter, powerpoint presentations of various speeches, and photographic glimpses of his exotic travel adventures.

Bruce went to John’s website, and he saw his most recent venture was Antarctica. He took a 24-day trip here. He left Tasmania, south of Australia, went 1250 miles south across the southern ocean, and through the ice flows. From here they broke out into the bay that is down off the coast of Antarctica, crossed the bay, then went to the deepest penetration you can get by sea into the depths of Antarctica. The stopped at a couple additional islands, and it was an extraordinary adventure. Some of it was spent at the bow of the boat during a windstorm. He said he is a bit of a nut when it comes to adventure. They were in 50 mph winds with waves that were 25-30 feet high. He was out there alone in temperatures 1-2 degrees below freezing. As the boat was going along, the captain would be nudging away from going into the wind. This was where they were trying to get. Every once in a while they would go over wave, and instead of hitting them at a glance they would stick to the bow of the ship in a 30-foot wave. The entire boat would shudder, and the spray would go up six stories in the air. Because of the wind, when it hits you it is like blowing sand.

This was not the first story John shared regarding his adventures. He jogged in Africa, and it was not necessarily in the safest of areas. He ran 8 ½ miles through the heaviest concentration of lions. He was in his late thirties, and it was not the brightest thing he had ever done. At the very end of it when it was realized he had run through lion territory, he got on the truck and two miles later a lioness that was asleep on the side of the road came out of the ditch and took a swipe at the side of the truck.

The picture Bruce usually has of John is him lecturing. These stories are quite the other side of him. This is what he does to get away from the suit and tie. John has been in the Inland Empire for about five decades, and looking at the economy Bruce has always been fascinated with his progression of a city or a county. He has done it in stages, and to Bruce this is a very key insight. Bruce asked what stage the Inland Empire was in the 60s and what the progression was. John said in the 60s the area was independent of the rest of Southern California. John said what we would have called the integrated Southern California economy had gotten to Claremont but not to Montclair or Chino. It had gotten to Claremont and no farther when he first started studying it.

They also had their own economic base in the area. There was Kaiser Steel in Fontana and the Santa Fe repair shops in San Bernardino. There was some aerospace work going on in Riverside. It was its own place, so it was only later that Southern California reached it. This really started to happen in the middle to late 70s when the first stage of development occurred. This happened when the residential community came to the conclusion they could no longer build a home that a middle class family could afford in LA or Orange Counties. They migrated into the Western Edge of San Bernardino and Riverside, and they were also starting to move into Corona and Upland, Montclair, Chino, and Ontario. You have this first move where you start to get hooked up to the greater Metropolitan area. When that occurs, there are a couple characteristics you always see. The first one is a lot of people and no jobs. Almost everybody is a commuter. A little later on Stater Bros. shows up with a store, then CVS shows up with a pharmacy. Someone else may open dry cleaning, and you get the consumer service or population’s serving activities generally relatively low-paying. They take care of the secondary wage-earners and families. The incomes are not high enough, so the primary wagers are still commuting.

This is something we see right now in three places. First of all, you see it in the High Desert. This is exactly what is occurring up there. You also see it in the South I-215 of Perris, Menifee, Hemet, and San Jacinto. You also see it a little bit in the Pass area going out to Beaumont. To show how precise it is, it did not move out quite as far as Banning but rather stopped in Beaumont. This is generally the first stage in the development. This is also a big deal to know in advance. It’s good if you can look at something and see something in one stage but headed into another. If you are a developer and auctioning land when it has been sitting there forever, then at this point the view is that nobody in their right mind would want to go so far away to live. Lo and behold, pricing sends them there.

Bruce asked about the 2014 version of the Inland Empire and how we differ economically from Orange County. John said we have gone through two of three stages of maturing. Where Orange County is far into the full flowering of region, we have not gotten this far. The second stage of development is when another group of developers ends up with the same need that you had earlier with housing. They need a lot of land and cannot find it in the urban core, so they migrate out of the area. This started happening in 1985 in Ontario when the first big industrial facility was built. It brought the blue-collar based jobs, which was not a bad match for who moved there for affordable housing. We have been through this whole stage, and it has matured well into the Western edge of the Inland Empire. It is currently operating in the Moreno Valley, San Bernardino, and Redlands areas.

You are starting to balance off the relationship of jobs and housing at this point. However, you do not have the last stage of the maturing of an area. Orange County has gone through it, and the Inland Empire has not. This is the high end move. This is something you started to see in the last housing cycle. What you saw was all of a sudden you had a big demand for upscale affordable housing. This is the middle 30s-40s, possibly early 50s family that can afford a really nice house. However, they are priced so far out of line that in places like Orange County you cannot afford it. They begin to migrate, and what they bring is their education as well as their wealth, income, and spending. This brings you a high-end labor force that, up until then, you really did not have. The stage right after that is the companies who can really use those workers begin to fight it and a lot of them are willing to work for a little less.

This started happening essentially from Rancho to Upland to Chino Hills and all up the western edge, then down into Temecula and Murrieta in the Southwestern edge of the Inland Empire. When the housing collapsed, it shut that off. We will see the return of this, and it is when the area will begin to have a full matured economy like you find in places like Orange County. This city has a lot less commuters because they have gone through this third stage and have matured in their staying there. The jobs are there as well as the companies. Something John looked at the other day that surprised him was that just a little over 16% of Orange County’s workforce migrates out of the county every day to work. In this area, it is a little over 20%. There is really only a 4% differential. John said for anyone who does not believe this, he would welcome them to get on the I-5 and try to get from Orange County to downtown L.A. It is hard, and this is also true for the 405 going down to San Diego.

Orange County is much more mature and has higher income as well as a broader set of consumer experiences and entertainment experiences. However, the IE is really missing that last piece. John said if he really wants a good lawyer, accountant, financial advisor then the odds are 50/50 that he may have to go to Orange County, LA, or San Diego to find that person. Bruce asked if in the Inland Empire we are more heavily skewed toward needing an industry called construction to do well economically. John said absolutely because of nature of our workforce. The people who moved here for affordable housing was largely people who, on the basis of income, needed a lower-priced threshold on housing. That tends to be a screen on the education of the people who moved because income and education are so closely correlated.

You brought here a very large base of people who are not well educated. 46.7% of our adult population stopped their education at high school or less. This means they need jobs where they can get into the sector without major barriers of education like you would find in teaching or civil engineering. You can get into it, then work your way up the skill ladders to the middle class. Construction is one of those sectors because you badly need construction. Over half the jobs lost in the Great Recession came about simply because of that one sector. Thus far, although single-family housing has improved, we are nowhere close to a normal or boom level.

In 2013, we had round figures of about 6500 single-family housing permits. This is more than the previous four years, so there was a shift up. If you go back into the decade of the 90s, a lot of it was characterized by about a 7-year downturn in housing prices. The level we have today in 2013 is less than half of what was being permitted through the worst part of the 1990s. This means there is still a long way to go. It is interesting that this downturn has been characterized as a Great Recession, but for real estate it was a Great Depression. Nationally, the numbers have not improved. Construction is still in the doldrums even though there is probably some bright spots in oil areas. It is interesting that as recently as today, the chairwoman of the Federal Reserve system commented that her real worry for the continued base of the recovery is because the housing sector has not sustained the kind of strong growth you normally get at this stage in a recovery.

You almost have a dichotomy because. On the front page of one of his presentations called “Building an Expansion,” he had a chart that looked like a roller coaster. It showed the different emotional feelings you have depending on what cycle you are in. He had us pegged between optimism and excitement right now. This is probably the overall view. However, when someone like Janet Yellen says housing could be a negative issue, there are usually policies that become more favorable to help it out. The problem is that the policies to make it more favorable that Yellen and her colleagues can control is interest rate policy. In any historical context, today’s interest rates remained extremely low. They do not have the tools that they traditionally have to be able to stimulate it since they have already tried it. To date, it has not really worked for a variety of complex reasons. The big thing that caused this downturn was the mortgage market. This was what set it off, so it was the bulls eye of the issue and therefore will take time until it heals. We are seeing a lot of signals that there is healing occurring, but the patient is not yet ready to get out of bed and run around.

Regarding the healing part, there may be more psychological damage to real estate than Bruce was willing to acknowledge. If he looks at charts, we should be in the middle of a big bull run. They payments are affordable and the interest rates are still ridiculous, yet we are not in the middle of a bull run. This is why Bruce wondered if there is a psychological issue where people are looking at this and not even knowing if they are going to have a job or even sign up on a mortgage. You are putting your finger on what is probably going to be a 20-year phenomenon at least. John is old enough that his mother and father were in high school in the middle of the Great Depression. His mom graduated in 1936, and he was born in 1941. This generation’s experience of the Depression colored their views of risk versus being conservative throughout their lives.

John suspects we are going to see a hangover of this experience very similar to that. People are going to be much more cautious than we are traditionally used to in modern times as a consequence of this experience. Bruce asked if this forces household formation to lag as well as you have somebody in college saying they will stick around where there are no bills. John said he has friends with children in their 20s, one as old as 29, and they are all still living at home. All three of them are professionals, but they do not seem in any hurry to move forward. It is a completely new experience of that young generation, but this is partially caused by people going through a really tough time to get a job that you might be trying to find. A lot of people take this as saying this generation is going to be different, and they do not want the $10,000 square foot lot for the house. They want to live in an apartment and have flexibility on going wherever there is employment.

John is a great skeptic of this. Several people who were commuters were surveyed and asked if they favored moving closer to their job if it involved an attached home or apartment. 87 ½% said no. They then surveyed renters, and 72% said no. It really showed that contrary to what a lot of so-called advanced thinkers spend their lives talking to one another about, John agreed with Bruce. As the market heals, you will see people wanting to live in detached single-family homes. A lot of people in Southern California are from overseas. John has always found in the Hispanic community a tremendous desire to own a piece of land. This is the fastest growing group within the population. John’s instinct is if he is young and does not have children, then as an empty-nester he may think this way. But he does not see it this way having children himself who want to live in an apartment.

John also looks at his friends who are senior citizens, and he does not see them moving to downsizing. Their generation is used to space. John went the opposite direction. He went from a 2100 square foot house to a 3500 square foot house and it barely contains him. Bruce said he was glad to have somebody of his knowledge say this since his gut feeling was that their generation had their way because they were the big glut of people. They are the ones who have been catered to, so Bruce has also thought about if he will go down to a 1200 square foot, 2-bedroom common wall property. John said this is his fifth decade. He started studying the Inland Empire economy 50 years ago this year. In September he took a job at San Bernardino Valley College as a 22-year old college professor. Over that time, he has seen five major downturns in real estate. Every time at this point in the cycle, people begin to over forecast the behavior they are seeing at the bottom.

John remembered being in Claremont at a seminar in 1962, and one of his professors was on the city council for Claremont. He came in looking like somebody beat him up, so they asked him what was happening. He said that he was on the city council and that there was a young developer who wanted to put a tract of home north of Foothill Boulevard where nobody had ever built. The big argument was that nobody was going to want to commute from Claremont to L.A.

Tune in next week as Bruce continues his discussion with John Husing. For more information, you can check out his website www.johnhusing.com.

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