Friday, November 14, 2008

Inland Empire Economist John Husing #96

Bruce Norris is joined this week by Inland Empire Economist Dr. John Husing. Bruce asks John if we’re facing the biggest mess he’s ever seen since he’s been an economist. John says it’s the worst mess he’s seen in his life.

John talks about how we got here. In 2004 the real estate market detached from reality. The housing shortage created unbelievable demand creating massive price increases. Investors came into the picture. Prices started increasing even more since they tied up supply. It had nothing to do with real supply and demand issues. The creative financing made it even worse.

Bruce brings up that the same financing was available to consumers just as well as it was for investors. The consumer too became the speculator.

Bruce asks if the Feds are taking the correct steps to fix the problem. John thinks they haven’t fixed the fundamental problems. John says all homes bought in 2004-2007 are upside down. John says it’s one third of the market. That does not include those that used their home as a piggy bank and refinanced.

Bruce asks if foreclosure moratoriums have worked in the past. John thinks it’s just a delay. There are three parts to a loan: the principal, interest rates and the terms. Ultimately it’s about the principal. The mortgage backed securities market is where it’s getting held up.

Bruce talks about some for these solutions and how they only apply for those that have the adjustable loans and how that doesn’t fair well for those that didn’t participate in those programs.

John thinks we’re only about one third through the houses that are upside down and that doesn’t include people who refinanced. If the price gets down far enough, they could just walk away anyway.

Bruce asks if commercial areas are affected by residential. John says the office market was the third tightest office market in the US because many firms were moving here because the size and growth of our economy. There was a subsequent boom in commercial building. We’ve gone from 7% vacancy to 19%. There’s more being finished so it will bring it over 20%.

Retail sales have plunged due to unemployment in residential building in the Inland Empire (Riverside, Moreno Valley, San Bernardino, Corona, Perris). We have a 10% decline in sales so now the shopping malls are being affected. General Growth, who owns several shopping malls, might go under. Their stock price has been hit hard.

John thinks we’ll see a few more large retail stores go under. Numerous furniture stores are already out of business. The auto industry is getting hit hard but that’s part of an industry issue that’s ongoing.

Bruce asks John about the cities in California and if they will be dealing with difficult issues in their budget as real estate taxes take a big hit. John says cities will be affected. The biggest item in the discretionary budget is retail sales. When sales go down, that makes things difficult.

Bruce asks about the ramifications of when cities go bankrupt and who ends up holding the bag. John talks about damaged credit and investors not getting paid. The typical investor in bonds includes pension funds. Bonds are typically considered a secure and safe investment. Triple A has really been misleading as many of these investments have not turned out to be safe at all.

As real estate supply increases, the supply of homes has dropped significantly. Demand has gone up but the supply is still too strong. The supply is what has to be addressed. As long as the supply still is too high, we won’t see new homes being built as it won’t pencil. Locally, if builders get the land for free, builders still can’t build because the fees and materials are still too expensive. Homes are going for less than replacement values. So many industries are connected to the building industry. 95% of all job losses in the Inland Empire can be traced back to the residential construction industry. The unemployment rate in the inland empire has reached 9.1%.

John doesn’t think high unemployment is causing too much out migration. John thinks nationally we are having a difficult time so there are no real safe havens.

Bruce asks if California has ever seen 12% unemployment. John says no and the worst for the Inland Empire area was 1993. That was localized because of the space/defense industry job losses.

Commercial construction is now not penciling. The projects currently underway will be finished. John doesn’t think another office space will be build until 2013-2014. We have to absorb around 20% vacancy rate.

With the US going into recession, world trade has slowed down substantially and directly affects the Inland Empire because of lack of warehousing and distribution space needed. Construction will now stop in the industrial market which is typically very strong.

Bruce asks who the typical lender is in the commercial market. Local banks and pension plans are behind some of these projects. Bruce feels they will own a lot of real estate in the coming years. This is happening in Orange County as well because the Financial Industry was hit so hard.

Technically many of these buildings are still leased but are now vacant. They don’t show up as vacancy. Therefore the availability rate is a better indicator John says.

Bruce asks about apartments. John says the coastal markets have the best chance of doing well. In the Inland Empire it hasn’t shown up as a bright spot. John thinks many people are moving closer to their jobs. Vacancies have actually increased. It’s a market we don’t have good data on.

Bruce and John discuss about the oil market. John says lower gas prices are like a tax decrease which helps in the short term. In the long term, projects we were hoping was going to happen are now on hold (alternative energy projects). Bruce talks about the how this is a repeat of the 80s.

John talks about an oil set price solution and how it might help.

Bruce talks about the new regulations and how REO agents are going to adjust. They’ve laid off staff knowing they will have to hire them back to handle the huge volume coming shortly. John really thinks we need to find out how can we get restructuring on the underlying loan on the mortgage backed securities. See Dr. John Husing on his website at

In August 2006, Dr. John Husing was listed by the L.A. Times Magazine as one of the 100 most powerful people shaping life in Southern California. He is a leading authority on the impact of the goods movement industry on the region, and in particular its role as a provider of upward economic mobility to blue collar workers. He has just completed major studies on the impact of the proposed Clean Truck Program at ports of Los Angeles and Long Beach and has recommended some changes in strategy.

In addition, Dr. Husing has spent decades studying the city & county economies of Southern California with a specialty on the Inland Empire. This research began when he began working on his doctoral thesis at Claremont Graduate University in 1964. For the past 43 years, Dr. Husing has conducted extensive research plus interviews with executives and entrepreneurs to understand the forces shaping Southern California. He has a deep understanding of our political process, having managed over 100 partisan and non-partisan campaigns. Today, he uses his extensive knowledge of the region and his political experience to explain the economy to business leaders and policy makers throughout the Southland.

Privately, John Husing enjoys life as an adventurer, taking treks into uncharted territories as well as traveling to 52 different countries. In recent years, he has twice entered the unexplored jungles of NW New Guinea to make first contact with previously undiscovered stone-aged tribes. His last trip was trekking over the Himalayas from Nepal into Tibet. Closer to home, Dr. Husing is an amateur genealogist with his American roots traced back 12 generations to Robert Fuller and his family on the Mayflower.

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