Norris Bruce
May 23, 2014

Economist John Husing #383

John Husing

Bruce Norris is joined again this week by Dr. John Husing. Dr. Husing is the leading authority on the Inland Empire’s economy, an area 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.

In the last segment they touched on the nature of this generation that is staying at home. There is certainly the political push at this point to have immigration reform. In the Inland Empire we certainly have our share of immigration. Bruce asked John if an immigration change will probably curve in the next twelve months. He also asked what affect it will have on housing. John said first of all that he does not expect anything to get though the Congress. He does not think they are capable of this. Long-term he does not think there is any choice that we will in fact see immigration reform in some form occur. We absolutely need it at several different levels. This program is about real estate. If you look at the western edge of the Inland Empire, what you see happening is a large influx of very well-educated professionals and entrepreneurs who are Asian. It is one of the new trends that is affecting the Inland Empire as that activity migrates out of LA and Orange County. It is very much affecting particularly some of the higher-end towns such as Chino Hills and Eastvale and Rancho Cucamonga in the West End.

John thinks the affect is already there, and it will grow. In the Hispanic Community there is such a heavy desire to have property with a home on it that will also be something we will see coming into the market because of the value system in that community. It is very normal for California to have strong immigration when we have a great recession that is retargeted quite a bit. There are some counties that were losers and others that were still positive. Bruce asked where the Inland Empire fits into it. John said if you take the last six years combined ending in 2013, over that period of time we lost a net of $25,000 domestic and foreign migrants. If you looked at people migrating in and out, we lost people during that period of time. This was a drop in the bucket, but we were not used to it.

They probably did not leave here and go back to LA, Orange County, or San Diego. They probably left for places like North Dakota, Texas, or Arizona to go to work. This is because of the difficulties in our economy. This will turn around as the housing market begins to repair itself. When you say the 25,000 downside is not significant in the sense of numbers, in a way it is because you are absent of anything positive. You have six years of non-positive, and you are used to this. Typically the Inland Empire is seeing a domestic migration from the coastal counties inland, and it is about 40-50,000 people a year. It shot up as high as 90,000 in 2004 and 2005 then dropped off to 70,000 in 2006. That was huge, and it is something we are used to and largely driven by differential housing prices.

John recently had surgery. When he talked to the nurse afterwards, she told him she lived in Eastvale. Her husband works as an executive in a manufacturing firm in Orange County. They decided it was time to quit running and go upscale in housing. They looked around Orange County and ended up in Eastvale in Riverside County. You can get a brand new house here with substantial square footage versus a decaying tract home in Orange County. This is how it works. People do not come necessarily because they want to, but rather the pricing system says if you want a home you do not have a choice.

Bruce has always been fascinated with the psychological side of charts. When John says we are in the state between optimism and excitement, people react differently who own businesses or taking on risk when they are in that mode as opposed to a down mode. What is interesting is that we are in that mode of where it seems we are about to take off and have a mood shift, and our volume of sales is down this year. If you look at the existing home market, a lot of that is a lack of supply. People have not been willing to sell at these prices, and there is another group of people who have not been willing to buy at these prices. The FICO scores are still running in the middle 7s, having gone from 750 to 724. John went back and checked to see what it was during the boom, and for some of the types of mortgages it was down in the middle 6s. A lot of people who could have bought it at a normal time cannot buy right now because the credit of ratings have to be so much higher. You have a lot of this going on in the market.

One of the reasons we have a lack of supply is because there was so much purchase of housing for rental where houses would go into foreclosure. They were supposed to go back to the financial institution but never did. They were immediately peddled to Wall Street funds to become part of a portfolio of rentals. This really soaked up an enormous amount of housing and really barred regular people from taking advantage of the prices when they were low. If you add up all the homes they bought, it was significant but not as many as foreign buyers. What was significant is that they made an offer on everything that moved.

When you talk to real estate agents who were trying to find a house for a couple who wanted to buy one, they were really frustrated. A lot of the market has been foreign buyers. You had Wall Street injection buying it up in bulk as well as foreign buyers buying for their portfolio. This has created some serious problems in some of the economies where single-family neighborhoods have seen a lot of rental homes. This is not the best urban environment because these neighborhoods were never set up to be essentially absentee-owned multi-tenant housing by having a lot of single-family homes all go rental at the same time. The High Desert is fighting this right now, and it is really scaring people. Bruce asked if the properties are being taken care of differently since they are rentals.

There are 2-3 things you see in these situations. One is if it is a rental, the odds of it being taken care of as well as an occupied-owner home are not as good. This is a piece of the problem. A second piece of the problem is when you look at the pressure on public services. He just did research on the High Desert area, and the number of people per unit is far higher in rentals than in owner-occupied homes. You get more calls for police service. The lowest number he saw was just under 20%, while the highest was 50% higher. This is not 50% of calls, but rather a 50% likelihood of calls in rentals. This is also true with fire service and code enforcement. When you get it really out of hand, which occurred in both San Bernardino and Moreno Valley, it began to affect the school system. You had lower income renters moving from home to home to continue to get the best deal. This meant their children kept changing schools, which really disrupted the ability in the elementary schools to teach. These issues were never thought about when the Obama Administration and the Fed said things needed to be rented.

What is interesting about this supply of homes is when you form a reit made up of 100,000 homes, they are not coming back to be sold to mom and pop. They are like a scattered apartment. At one point John Husing put the entire block of San Bernardino into escrow back during the housing downturn of the early 90s. On that block, there were four homes he left alone. These were owner-occupied, while the other 26 were all rentals. They were not the same owner, but rather multiple owners scattered all over the Western United States. This is essentially a multi-tenant operation with no ownership to whom you can talk.

Bruce has rentals, and most of the people he knows have rentals. It is a sore subject in the sense that there are entrepreneurs trying to do things not necessarily for themselves. Bruce said generally when they buy the homes they have been trashed or vacant, and they bring them up to speed. Investors bring something to the party as well, although John said they have not had enough experience with the Wall Street move to know how this is going to play out in the long run. When you start talking about people who live in Washington state, Hong Kong, Thailand, or Seoul then you have a problem on your hands. You certainly have a potential, and it will be local management. Bruce hopes they are not trying to manage them themselves. John said one of the things they are running into in the High Desert is if they get a house that is out of control, they cannot even find the owner. It is a real difficulty they are struggling with in Apple Valley, Hesperia, Victorville, and Adelanto.

A lot of people will be willing to sell at the price they can get, but they are afraid they will not be able to requalify for a loan. This is as much a problem as anything else. John said where he sees the market at this point is we have at least one more year of healing. He thinks with the market in 2015, you will see some light finally shining. The number he watches the most carefully is the share of the market that is still underwater. In the fourth quarter of 2009, 56% of all homes in the Inland Empire that had mortgages were worth less than what they owed on the mortgage. People were frozen in place. Today it is 19%; so it has come down dramatically but is still one out of five. If prices continue moving, even if they are not as aggressive as they were last year, it will start to make the current homeowners feel a little more confident. That is an important piece of this puzzle.

From the start of 2013 to the end, if you had any thoughts of not making your payment, you probably hung in there because it looked like they were going to break above water. When you look at the first stage in the mortgage market, when a family is in trouble the first stage is the notice of default. For the last 3-5 months in a row they have been at about 20-30% of where they were in January 2007 when this problem was first getting started. The number of foreclosures has dropped dramatically, and last he saw it is at an 8-year low. That problem is working its way out of the system. What you need now is the restoration of confidence in people who have not been in the market and those who have been living in homes and have not made the decision to buy up. This is often a major piece of the market, particularly for newer homes. This is where we sit right now, and at this point it is more psychology.

Normally when you have a downturn like what we had, you have first-time buyers making up 50% of the market. We are at about 25-27% right now. This is a large chunk of buyers not participating, not because they can’t afford it since the interest rate makes this possible, but because of the unwillingness or incapacity to qualify. One of the things people have also mentioned is college debt, which is an interesting factor that has moved in and has had a lot written about over the years. Bruce is not sure he buys it, but he would have to take a look and see. John has a grandson who is a sophomore in college, and because his daughter is not in the position for him to borrow money, John is helping pay a considerable portion of his tuition to make sure he doesn’t graduate. What he means is he is at a state school in Virginia, and if he had to borrow it all he would be graduating with $80,000 in debt. He has earning capacity that is supposed to be twice the median.

When you get an education or want to get a trade, that game has changed to needing to become an expert at something that was not even necessary 10-20 years ago. John said in his area his instinct is their biggest single problem. You have an area where over 46% of your adults stopped their education in high school or less and the job market going in the direction of needing advanced degrees or technical skills. We are not training the technical skill piece anymore, rather we gave that up about 20 years ago. This is one of the dumbest things in society that we did. We do not have a system of adult short course workforce training; it does not exist. The community college don’t do it, but rather they basically do the first two years of a four-year education. They do some certificate programs, but if you are looking at the kinds of things that need to go on in manufacturing or logistics, there is no real avenue for training right now. It is a gigantic issue for California.

Bruce said if he pulls up a list of business-friendly states, California is not on the list until #49. Last year in the CEO magazine we were at #50. If you looked at the rating on our regulatory policies from the entrepreneurial businesses, we got an F. John said to not even get him started on how California is doing. It is a disaster, and it really gets down to the instability of our regulatory process. If you give businesses rules, they will figure out it will make profit within those rules. However, if the rules are going to change constantly, then they don’t know what the environment is in which they are supposed to be investing. They are going to pull back.

If you put those rules out there and have a lot of people who were supposed to approve whether you obeyed them or not who decide at their own pace when they will get around to it. You delay so many times, and now you have compounded the problem. Then, you toss in the possibility of anybody who wants to file a lawsuit under something like SEQUA, and you are missing the point of who will get hurt. The answer is it is not the companies since they can go someplace else. The ones who get hurt are the workers since you have just shut off the jobs they need to be able to climb out of poverty. It drives John nuts to think about that fact, but that is the case with this state. He thinks it largely emanates from the fact that a good deal of our economic policies come to us out of the central coast from Monterey north to Santa Cruz. The Bay Area going up the I-80 to Sacramento is an area that is highly educated and upper middle class. They think this is normal, and unfortunately they have the ear of the leaders in Sacramento.

For decades, our policies completely ignore places like the Inland Empire and the Central Valley. What this has created is increasing levels of poverty. There is a benign neglect going on from the people who think they know better and don’t. Bruce asked John if he sees serious out migration of businesses. This happened with Toyota and was a real wake-up call. John said he wished they told the truth instead of saying it had nothing to do with California’s regulation. If you talk to anybody who leaves California, they will tell you privately that they just wanted to get out of the state. However, he does not see the migration out as the bigger problem. John said he has to be in this market often because there are certain reasons to be in California because of the size of the markets and all the rest. He will put the gross someplace else, whether it is Nevada, Arizona, Oregon, Utah, or Texas.

The bigger problem is there are no companies that really look to California as the place they really want to go. On the contrary, it is the place they really want to avoid. People can say the things they worry about are not true. The perception becomes the reality if no company will come. John remembered when Boeing was looking for the second place to be building. There were some people who wanted the economic agency to put together a package that talked about California. They called John for some data, and he just laughed and said he was not even going to waste his time. There is no chance on earth they would consider coming here given the instability of our regulatory processes.

For more information, you can check out his website www.johnhusing.com.

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