No area has really been able to escape the housing bubble burst, subprime mortgage crisis, and waves of unemployment and foreclosures – all of which have resulted in our current situation. However, California has had a particularly difficult time in the past few years, and within California a few regions have suffered significantly more than others. One area that has garnered not only statewide but national attention is Riverside County.
Just 45 miles southeast of Los Angeles, Riverside has captured the nation’s spotlight not for its numerous golf courses, Indian casinos or wineries, but for its abundant foreclosures. The county’s high rate of foreclosure has gotten so great that one in every 27 homeowners had defaulted on their mortgages during the first quarter of 2009.
Throughout the first three months of the year 28,080 notices of defaults, bank repossessions and auction sales were delivered to Riverside residents who had fallen behind in hard times, according to RealtyTrac. This represents a 35 percent increase from a year ago, and a 44 percent increase from the fourth quarter of 2008.
Though these statistics clearly shine some light on the sad state of the county’s housing market, they don’t really tell us how Riverside got here and how long it will likely remain upside down – two factors that are extremely important to current and potential homeowners.
Middle Class Unemployment
With numbers like the ones above it’s easy to see why Forbes.com ranked the Riverside area as the third hardest area in the country to get by. It noted that a mix of unemployment and a high cost of living has made Riverside a difficult area for many to make ends meet.
The unemployment rate for the Inland Empire, which consists of Riverside and San Bernardino counties, has continued to rise as the recession deepens, posting some of the highest numbers in the country. Even within the past few months the rate continues to increase steadily, rising from 12.2 percent in February to 12.9 percent in March, according to the Employment Development Department.
What’s made the unemployment rate so prominent and so deeply connected to the county’s high rate of foreclosures is the type of workers who are facing unemployment. Many are victims of the fallen housing market themselves, as construction has halted, real estate brokers are only selling a fraction of the homes they used to and lenders have all but packed up entirely.
This has created what many local economists are calling a middle-class recession. Typically, the low-income sector is hit hardest by a recession, and although they are also feeling the pinch it seems that the middle class have felt the deepest effects of the recession. This is because borrowing and living beyond one’s means have left many middle-class people – especially those in Riverside County – homeless, jobless and with great debt, if not altogether bankrupt.
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Bigger Homes, Bigger Busts
The temptations that Riverside County has to offer, which includes warm weather, affordable housing, numerous tourist destinations and a centralized Southern California location, have remained the same throughout recent history. These characteristics drew hundreds of thousands to the Riverside area in search of large homes with small price tags. Suddenly, not only could low- and mid-level employees and executives afford a home close to work, but they could oftentimes afford larger homes than higher-up executives who lived in Orange County or Los Angeles.
When faced with the prospects of a one-bedroom condo in West LA or a 3,000-square-foot home with a pool inside a golf community, many chose to move to Riverside to live the high life. And let’s not forget how eager lenders were to get these workers into homes that, for many, have proven to be beyond their means. Soon the area was a flitter with new residents, new construction and new jobs, boosting the local economy and spurring even more lending. To economists, however, the stage was being set for a bust as the region expanded beyond its control.
Mason Gaffney, an economics professor at UC Riverside, explained just what happens to areas like Riverside County when a recession hits. “There is a long history of land-value cycles lasting about 18 years,” he said. “In all such cycles, prices in the growing fringe areas [like Riverside] are most volatile. One reason for this is that fringe areas during booms import capital from older settled areas, and quickly grow to depend on it as part of the economic ‘base,’ but it is an unstable base…[Riverside County] fits the pattern of fringe areas growing faster than older areas.”
In essence, the region seemed to build itself up immensely before it ultimately had to feed on itself, bringing down, in the process, many of the industries that had created such a boom for the region just years earlier. What was created was a dialectical relationship between the housing market and unemployment rate. As equity and employment dropped, many homeowners could no longer afford their mortgages.
“Borrowers secured the loans by pledging real estate as collateral,” Gaffney said. “When the collateral value fell, the chain of bankruptcies began.”
In Riverside, the collateral value not only fell but plummeted. In late 2006 the county’s median home price was $430,000. This past March that number had shrunk to $187,000, resulting in a 57 percent drop in equity, according to DataQuick. Today, the median monthly housing payment that buyers will agree to is $1,074, which is $726 less than last year’s typical agreed-upon payment.
Bigger Homes, No Loans
Though there are many foreclosures on the market that can satisfy a number of potential homebuyers looking to take advantage of Riverside’s fallen market, there are also numerous vacant properties that have been seemingly impossible to fill. This is because they are priced at or above $417,000, which would qualify them as jumbo loans. Being that a traditional loan is hard to come by these days, it’s even less likely that anyone without impeccable credit and substantial worth will obtain one, especially in a foreclosure hotspot like Riverside County.
Many banks have turned to renting these homes, hoping to make at least some money while they remain unsold. Others have left the homes vacant and unkempt, creating neighborhood eyesores and targets for squatters. This is why many cities within Riverside County, including Temecula, Murrieta, Beaumont and San Jacinto, have created registry laws that require banks to register foreclosed and abandoned homes. These laws hold the banks accountable for their properties’ upkeep. Those that fail to register or maintain their properties face steep fines imposed by code enforcement officers. So far these laws seem to be effective. They keep the banks accountable for their properties (something we can all appreciate) and make neighborhoods more attractive, both to current residents and to potential homebuyers.
Sadly, there is no speedy recovery in sight for Riverside County. As it now stands the region has too many foreclosures and too few jobs, with each expected to become even more compounded in the next year or so. A new wave of foreclosures was just released last month after a marked delay that was caused by moratorium and state laws. The moratorium required lenders to contact and work with borrowers before foreclosing, while the California law required lenders to wait at least 30 days before sending their default notices while they worked with borrowers.
Pricing strategies may also result in large chunks of foreclosures entering the market over time, instead of all at once. “The local banks, coordinated by Congress, are colluding to hold most foreclosed real estate off the market, to maintain prices,” Gaffney said. “This behavior is straight out of the 1930s, and will slow down recovery, which can only come from filling up the vacant buildings, putting them to economic use, employing and sheltering people.”
Gaffney also noted that the commercial sector is similarly suffering in Riverside County, and will not likely rebound until after some of the housing problems have been ironed out. “What’s most needed now is commercial credit, which has dried up because lenders have sunk so much into bad loans on real estate,” he said. “They cannot make new loans much faster than borrowers pay off the old ones. With 30-year loans outstanding, that takes a long time at best, and at worst the borrowers default.”
Despite the doom and gloom, Gaffney admitted that there are some bright spots in Riverside County, particularly for first-time homebuyers who were previously priced out of Southern California’s housing market. “Desperate banks auctioning off toxic assets will provide bargains for new buyers to fill up some of the empty buildings and get the ball rolling again, [and] desperate builders with unsold inventory will slowly join them.”
Overall, however, unless you’re an investor willing to buy at record-low prices for the trade-off of having to wait many years for a market turnaround you may be out of luck in this county. Unemployment is likely to stay high as construction remains halted and foreclosures offer better deals than the traditional sales that brokers are used to executing.
“Forget about reviving construction for quite a while,” Gaffney said. “The market will not rebound in the sense of rising prices, but it may and should rebound in the sense of more use of existing buildings…My crystal ball says it will take a long time for the nation to recover, and that means an especially long time for Riverside, at the fringe of growth.”