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Southern California 2009 … A Very Difficult Year!

Southern California 2009 … A Very Difficult Year!. John Husing, Ph.D. Economics & Politics, Inc. So. Calif. Job Change, 1984-2009. Inland Empire Job Change, 1984-2009. Worst National Unemployment Rates. Now 12.2%. Inland Empire.

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Southern California 2009 … A Very Difficult Year!

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  1. Southern California 2009 …A Very Difficult Year! John Husing, Ph.D. Economics & Politics, Inc.

  2. So. Calif. Job Change, 1984-2009

  3. Inland Empire Job Change, 1984-2009

  4. Worst National Unemployment Rates Now 12.2%

  5. Inland Empire Unemployment Can Get Stuck For Years U.S. Unemployment History, 1929-2009 26.0% 24.0% L not U 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1933 1935 1941 1943 1949 1951 1957 1959 1967 1969 1975 1977 1981 1983 1989 1991 1997 1999 2005 1929 1931 1937 1939 1945 1947 1953 1955 1961 1963 1965 1971 1973 1979 1985 1987 1993 1995 2001 2003 2007 2009 Source: U.S. Bureau of Labor Statistics & U.S. Census Bureau

  6. What Happened?

  7. Shrinking Our Economy $8.6 Billion Hole In IE Economic Base

  8. -$17.2 Billion Loss To The Economy Gold Mine Theory Secondary Tier Another -$8.6 Billion Primary Tier -$8.6 Billion

  9. Taxable Sales Decline

  10. Just Under LA & OC Production In 2006 or 2007 Housing Demand Rose With Population CA Home Restrictions Slow Growth NIMBYs Endangered Species Water Keep “Them” Out of Our City 1997 18.3 million people/3.9 million SFR homes = 4.66 1997-2007 Add 3.2 million people: Need 709,600 homes = 4.66 1997-2007 Actual New homes 552,900 1997-2007 Shortfall 156,700 Annual Production Too Low: 15,670 a year

  11. $404,611 Prices Had To Take-Off To Eliminate Buyers Exhibit 8.-Price Trends, New & Existing Homes Inland Empire, 1988-2008, Quarterly 420,000 400,000 380,000 360,000 340,000 320,000 1997-2003 12.9% per year 300,000 280,000 260,000 240,000 220,000 200,000 180,000 160,000 140,000 120,000 2003-2006 19.7% per year 100,000 80,000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Dataquick

  12. Price Peak 31,545 29,670 19,664 11,398 Sales Soars Until Late 2005 Exhibit 11.-Existing & New Homes Sales, Inland Empire Seasonally Adjusted, by quarter, 1988-2008 32,000 32,000 30,000 30,000 28,000 28,000 26,000 26,000 24,000 24,000 22,000 22,000 20,000 20,000 18,000 18,000 16,000 72.5% 16,000 14,000 14,000 12,000 12,000 10,000 10,000 8,000 8,000 6,000 6,000 4,000 4,000 2,000 2,000 0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Dataquick Source: Dataquick

  13. $404,611 $211,547 Prices Back to Early 2003 Levels Exhibit 8.-Price Trends, All Homes Inland Empire, 1988-2008, Quarterly $420,000 $390,000 $360,000 $330,000 $300,000 $270,000 $240,000 $210,000 $180,000 $150,000 359,044 SFR Homes Traded 2004-2007 More Owed They Are Worth! 33.5% Of IE’s 1,071,071 SFR Homes $120,000 $90,000 $60,000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Dataquick & Economics & Politics, Inc.

  14. Supply: Foreclosures Sales In Jan. 2009 71.2% of Riv. Co. 67.3% of SB Co.

  15. 52.1% Demand: Affordability Exhibit 12.-Share Able To Buy Median Price Home Inland Empire, 2000-2008 53% 45% 18% Where is Price Floor? 2000 2002 2005 2008 Source: CA Association of Realtors, 2000-2005; Economics & Politics, Inc., 2008

  16. Demand & Supply Demand From Lower Prices Supply From Foreclosures vs.

  17. Foreclosure Supply Still Overwhelming Demand And The Winner So Far ….

  18. Key:Reducing the Flow of Foreclosures

  19. Current Market Status • 151,985 of 359,044 Homes Sold 2004-2007 Notices of Default • 207,059 Upside Down but Not Yet in Visible Trouble

  20. Defaulted Homes • 151,985 Notices of Default • 134,251 through 90-Day grace period • 103,205 (77%) foreclosed … 44,536 (23%) worked out

  21. Upside Down Homes • 207,059 Upside Down … Not Yet Notices of Default • 17,734 NOD Grace Period • 224,793 Future Issue!

  22. Pace of Future Problem Alt-A Option Adjustable Sub-Prime

  23. $243,000 $147,000 $136,000 Inland Empire’s Long Term Competitive Advantage Still Exists Exhibit 136.-Home Price Advantage, So. California Markets Median Priced New & Existing Home, 4th Quarter 2008 $455,000 Median All Home Price Lake Elsinore Advantage $359,000 $348,000 Have To Get This Crisis Behind Us … $8.6 Billion Hole to Fill $212,000 Inland Empire San Diego Los Angeles Orange Source: Dataquick

  24. Fed Raised Rates Cut Money Supply! Fed’s Ben Bernanke President Hoover Worst Potential Financial Crisis Since 1929

  25. Loan Servicer Will Do Nothing To Hurt the Interest of the Investors Mortgage Low Risk Investors Mortgage Group Home Buyer Fannie, Freddie Investment Bank High Risk Investors Issue: Mortgage Backed Securities Loan Originator Loan Servicer

  26. NO! Hurts The Interest of the Investor Two Strategies #1 Reduce the Principal Owed

  27. Lower Payment Stay In Home BUT Upside Down Never Able To Sell! Two Strategies #2 Cut Interest Rate Lengthen Term Leave Principal Alone Inland Empire Upside Down Too Much For These Strategies! Obama: FNMA, Freddie Mac If Owe 105% Refi To Lower Rate Obama: If 38% of Income, Share Cost of Lowering to 31% of Income

  28. Reduce Principal Purchase Price $400,000 Owe $350,000 Today’s Value $250,000 90% of Today’s Value Paid To Investor $225,000 Loss to Investor $125,000 30 Year FHA Mortgage, Less Principal & Interest, Lower Payment If Sell Early For Over $225,000 Profit To Lender Only For Existing Mortgages Obama Cramdown: Bankruptcy But Must Negotiate First

  29. What About Moral Hazard? Unless We Cut Off The Flow of Foreclosures … If Foreclosures Not Lowered … No Recovery Until Past 2012

  30. Being Sued By MBS Holders Attempt To Get To First Strategy • Hope For Homeowners • TARP: Govt Acquire Mortgages (Didn’t) • BofA/Countrywide • Bankruptcy Judges (Passed House, In Senate)

  31. $404,611 $235,000 $211,547 Local Action:Prices Back to Early 2003 Levels Exhibit 8.-Price Trends, All Homes Inland Empire, 1988-2008, Quarterly $420,000 $390,000 $360,000 $330,000 $300,000 $270,000 $240,000 $210,000 $180,000 $150,000 $120,000 $90,000 $60,000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Dataquick & Economics & Politics, Inc.

  32. At 2004 Prices: 2,500 SF homes, 7,200 SF Lot • Revenue $324,000 • Land Cost $0 • Construction $288,980 • Fees $42,897 • Loss -$7,847 -2.2%

  33. -60% Agency -40% School At 2004 Prices: 1,500 SF homes, 7,200 SF Lot • Revenue $252,000 • Land Cost $0 • Construction $221,540 • Fees $16,567 • Profit +$13,893 5.0%

  34. Savers Account Mortgage Borrower Secondary Market More Loans Issue: Financial Freeze x Bank, S & L, CU Auto Student Personal Business • TALF: Term Asset Backed Security Loan Facility Creates Secondary Market • Mortgages • Auto Loans • Student Loans • Personal Loans • Short Term Business Loans

  35. Borrow $787 Billion & Spend It Restoring Demand • Consumer (Scared) • Business Investment (Can’t Borrow) • Export Growth (Dollar Value Has Risen Again) • Government Borrow & Spend (World War II Experience)

  36. Borrow $787 Billion & Spend It Collect $787 Billion In Taxes … Cuts $787 Billion In Private Spending Spend $787 Billion Collect … Effect is NEUTRAL on Demand Collect Taxes … Spend That Amount Borrow $787 Billion … Spent That Too … Adds $787 To Demand

  37. Has This Been Tried?

  38. 14.5% 9.7% 4.7% 1.9% World War II As A Giant Stimulus Effort U.S. Unemployment Rates Entering World War II 1940 1941 1942 1943

  39. Why Do This? Have To Fill Hole In Our Economy $8.6 Billion Hole In IE Economic Base

  40. Blue Collar Industrial Jobs

  41. Why Blue Collar Jobs Important

  42. 20 million Sq.Ft. 7.1 million Sq.Ft. Quarterly Industrial Absorption, 1991-2008

  43. Moreno Valley-Perris 23.0% SB-Redlands 19.7% Ontario-Mira Loma 5.2% Industrial Vacancy Rate 9.9%

  44. 1. International Containers Thru So. Calif.

  45. 2. Ports On West Coast Nearest Asia Los Angeles Long Beach

  46. 3. Deep Water Ports As Ships Draw Over 50 feet of Water 8,000-Container Post-Panamax Ships

  47. 934 788 670 654 551 454 443 349 160 (164) (753) BUT (Warning) … Growth of Imported Containers Ports of Los Angeles-Long Beach, 1997-2008 (000) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Port Import Export Reporting Service (PIERS), collected from Vessel

  48. 1. U.S. Economic SlowdownLost 4,384,000 Jobs

  49. 2. Decline In Value of Dollar Feb-02 to Jan-09 -17.2%

  50. U.S. Products Cheaper Abroad Foreign Goods More Expensive Here Manufacturing: OpportunityLogistics: Difficulty -17.2% to Foreigner +17.2% to American

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