Riverside Will Lead the Way as the Inland Empire Becomes Big Deal in Real Estate
The most amazing thing about the following predictions
regarding the Inland Empire Real Estate Market for 2018 is that economics 101
is driving every single one of them. Here’s the list. The detailed explanations
follow.
1.
Prices of all homes in all price categories in
all neighborhoods will continue up
2.
Rents will also be up
3.
Mortgage interest rates will continue steady at
least through April
4.
Inventory of homes for sale and rent will be
similar to 2017. Extremely limited
5.
Moreno Valley will be the next city to gentrify
6.
The working poor will be forced further out into
the desert or out of California
7.
Distribution, logistics, health care, and
education will continue to drive growth
If you are reading this article, then it is likely
that you are actively watching the real estate scene in the Inland Empire. If
so, you might think the above seven predictions aren’t all that surprising. But
if you are a residential real estate owner, or you plan to either buy or sell
in this market, then you might be looking for confirmation of your own ideas of
what lies ahead.
For the most part, this article will examine the Inland
Empire from Ontario to Moreno Valley and from Chino Hills and Corona to Rancho
Cucamonga. Another way to imagine this region is to think of four freeway
corridors: The 91, the 60, the 10, and the 210. Now picture tens of thousands
of trucks moving along those roads to distribution, logistics, and retail
warehouses, and you get an overview of the present and future of the Inland
Empire.
If you agree with this list, or if you disagree in whole or
in part, we’d love to see your thoughts in the comments.
1. Prices of all homes in all price categories
in all neighborhoods will continue up
At the core of all markets we know
that supply, demand, and price are forever linked. If supply outstrips demand,
prices will fall. If prices go up to far, it creates downward pressure on
demand. We have not reached either of those points yet. The influx of people
and jobs in this region is far outstripping the ability of the builders.
Moreover, almost all new housing, both owner occupied and rental, is built for
middle class and upper middle class incomes. Affordable housing is
non-existent, resulting in Riverside being one of the least affordable cities
in California.
The Inland Empire is blessed with
plenty of suitable land to build new homes and apartments, but at least for the
foreseeable future, the builders can’t find enough labor to build needed
structures. The lack of workers has recently been cited by a University of
Riverside report to be so dire that it will affect overall economic growth in
2018, limiting it to 2.5% rather than 3% or higher that would be possible if
there was adequate labor.
The other side of the equation is
demand. The Inland Empire is benefitting from the outflow of skilled and
unskilled workers who can no longer afford to live in LA or OC.
The home prices in LA or double
those in Riverside-Corona, and triple those in some of the neighboring cities.
Add to this, the demand for housing
from students for the areas amazing centers of higher education, seniors
looking for warmer year-round temperatures and lower housing costs, and
millennials who are finally leaving their parent’s homes and looking for somewhere
affordable to live, and you have an almost limitless que of new potential
residents.
Finally, you have demand for higher
priced homes from the home grown opportunities that are seen throughout the
region. UCR and CBU are both growing their student populations, which means
more employee support and neighborhood service jobs. The AQMD is moving their
headquarters to the area, and a huge new Medical complex has just been approved
for south Riverside. And these are just a few of the many new projects that
will demand professional jobs.
And the distribution and logistics
projects are mammoth. Just the proposed World Logistics Center will create
20,000 jobs and create 40,000,000 square feet of warehouse and office space.
Price pressure is the third component.
The prices might get so high that the rational buyer or the incremental buyer
is priced out. They’d rather live in Texas, Idaho, or some other lower cost
state. Anything is possible, but the prices in these areas are not enough lower
at this time to draw folks away from the incredible opportunities in the Inland
Empire and the neighboring Counties of LA and Orange. Oh, of course, the
playlands at the beaches, in the mountains, and out in the desert might also
keep folks from looking too far afield.
2. Rents will also be up
Econ 101 tells us about rents as
well. Supply, demand price. Then you add in one more component…housing prices.
There are two reasons why housing prices effect rent. One is that tenants have
the choice to become owners, so there is always an equation that makes that
choice more appealing. It isn’t all about finance, of course. There are plenty
of emotional and practical elements, too. But the financial one is key even
then.
If the economics of owning a home
became so much better than renting, then the practical aspects such as length
of planned occupancy change. It becomes practical to own even if you only think
you’ll be in that home for four years instead of five.
The other side of the rent vs buy
story is the landlord’s equation. The cost of the property must be low enough
compared to the rent to provide the landlord with an appropriate return on
investment. As rents go up, so does the cost the landlord is willing to pay,
and vice-versa.
The
same factors driving up home prices are driving up rents. The Inland Empire is
not building even as many apartments as LA and OC. The shortage is
projected to last well into the next decade.
3. Mortgage interest rates will continue
steady at least through April
Can you find one pundit who, in
2012 or 2015 or even early 2017 would have estimated we’d still be under 5% for
30-year fixed mortgages? But here we are. We continue at these historic low
rates, even in the face of Fed tightening and the beginning of the Fed selling
off mortgages to reduce the huge overhang of assets that it has been carrying.
Why are mortgage rates still so
low, and why might we get another year of only slight increases? Econ 101
again. The folks demand to receive “real” returns on their safe investments of
about 2%. So if inflation is at zero, or close to zero, then real interest
rates for treasuries and super-secure bonds will be around 2%. Mortgage lenders
need to charge more than that, as home mortgages are not as secure as US
treasuries.
What is the spread between
inflation and mortgage rates. Around 3%. So an argument can be made that
interest rates should be closer to 5% with inflation now moving towards 2%.
And there is every reason to
believe that this will take place over the next year as the economy continues
to heat up and wages begin to climb faster. That has been the missing
component. To many folks out of the labor market or working way below their
skill level. That gap needs to close before wages start moving to where they
should be when unemployment is so low. It will probably happen this year or
next.
So the bond market doesn’t believe
in 2% inflation yet. Thus, mortgages for under 4%. There is also a supply
demand issue for the mortgages themselves. Far fewer mortgages are being
written, because home purchases and refinances are way down. This means too
many mortgage companies chasing too few mortgages. That is not likely to
continue. Markets generally close such gaps.
Figure mortgages around 4% until
April when the single-family season heats up. Then we might see 4.5%. If wage
inflation hits 2% or more for two quarters in a row, then 5% could happen in
2018.
4. Inventory of homes for sale and rent will
be similar to 2017. Extremely limited
When the market for anything gets really tight, and the prices
start getting really high, those who own the thing commonly start thinking
about cashing out. After this huge run up in housing prices, why aren’t folks
in the Inland Empire cashing out. The list is very, very long
A.
Where will they move? Housing gridlock. “I can’t
sell because there is nothing I want to buy.” It is possible that some wave
effect might occur where a bunch of folks decide to sell, and then there’s
enough inventory, which opens up another wave. This could happen because of a
fear of recession or future downward pressure on prices. This does not seem
likely. If you can afford to live in Southern California, there is not much
motivation to leave. If you do want a larger or smaller house, or one that is
in another neighborhood, you haven’t increased the local inventory at all.
B.
No mortgage. A very high percentage of the
owners in the Inland Empire have no mortgage or a very low mortgage with very
low payments. There is absolutely no incentive to move.
C.
Low mortgage interest rate. No incentive to pay
for a new mortgage that might be a point higher than now.
D.
Low property taxes – prop 13. If you move, you
are now paying current year property taxes rather than what might be
substantially lower taxes.
E.
Cost of moving. Currently it will cost the
average owner $35,000 or more to sell an existing $400,000 home and buy
another. For some who bought that same home for $150,000, $35,000 seems like a
lot of money.
F.
Been in the house for a very long time. Many
residents have lived in their homes for a very long time. Moving means
uprooting friendships, learning new neighborhoods, etc.
5. Moreno Valley will be the next city to
gentrify
You want a sure bet in real estate.
Think back to Venice in 2005. Santa Monica and Mar Vista were sold out. Culver
City had the fastest rising cost of housing in the state. Marina Del Rey was
sold out. Playa Vista was an old helicopter testing field and wildlife
preserve. Venice was surrounded and it was a gang-infested hell hole. Property
was dirt cheap and it was walking distance to some of the best beaches on
earth. What would one guess could happen someday.
Fast forward to 2018. Riverside and
Corona have a fair amount of land that can be developed, and both cities should
continue to see dramatic improvements in the infrastructure and the overall
appeal of the cities. But Moreno Valley is going to explode, assuming the World
Logistics Center gets built. Even if it doesn’t there is no doubt that the
future of major logistics expansion is in this city.
6. The working poor will be forced out further
into the desert or out of the state
What do you do if you can’t afford
$800 a month for a bachelor or $1200 a month for a one bedroom. You either have
to move to poorer neighborhoods or go much further east.
There are places in Fontana and San
Bernadino that are now improving due to the same pressures that are creating
improvements in RIverside. Not enough room for the folks who can afford more.
Thus those who can’t afford more have to move where the housing is affordable.
Where can you go? There’s still a
lot of land between Riverside and San Diego or Palm Springs. Unfortunately, the
drive times to work will kill you. Many of the working poor are already heading
to less expensive parts of the country.
 |
| Distribution Centers stretch as far as the eye can see |
8. Distribution, logistics, health care, and
education will continue to drive growth
The distribution centers in the
Inland Empire are driving massive increases in the ports and all types of
transportation businesses associated with distribution. Will we see hyperloops
built to move freight from LA and Long Beach Harbors to Ontario and the Moreno
Valley? Will headless trucks be driving in special lanes? Or will drones be the
answer?
Moreno Valley officials
suggested two possible headquarters sites for the new Amazon headquarters
facility that could be accessed with a proposed monorail built from the
Metrolink Moreno Valley/March Field station. They were just spit balling, but the future is their’s to
write.
Service jobs in health care and education
are growing much faster than jobs in construction or manufacturing. Look
for this trend to continue with the Riverside area having half the doctors they
currently need compared to other similar urban areas. The new health center
will only partially alleviate this need.
Any recession in the next few
years, unless it is worldwide and protracted, will be unlikely to slow down the
Inland Empire. The economics suggest that this area is well positioned for
years into the future.
If you are looking to buy or sell a
home In the Inland Empire area, Alice and Brent Bechtel are ready to help you. You
can set an appointment to discuss your real estate needs by calling Alice
Bechtel at
