The Good News/Bad News Situation for 2008
By Bob Yoder
With every New Year comes a prognosis for the future. For Riverside County, perhaps the most important forecast is for the homebuilding industry. As the epicenter of California's population growth, how we plan for 2008 will affect homeowners, government and our state's economy.
For the last two years, the number of new homes built in Riverside County has dropped dramatically. In 2005, over 30,000 building permits were issued in Riverside County, but in 2007 fewer than 10,000 were issued. According to the Construction Industry Research Board (CIRB), the decline means that direct permit valuation has decreased by $4 billion since 2005.
Put in terms of consequences, every house not built means less revenue available for local governments to build roads, parks, public safety facilities and schools.
Adding to the problem has been the subprime crisis and the subsequent tightening of credit standards. In Riverside County, upwardly-adjusting interest rates and foreclosures have forced many families to either sell or lose their home. All parties - lenders, buyers and homebuilders - contributed to a system where zeal for homeownership was met with lax lending standards and a frenzied housing market. Unfortunately the cheap credit expired with all parties now suffering the effects, including the government tax rolls. Lost property taxes and decreased consumer spending means less revenue for all levels of government.
In 2008, experts predict the housing slowdown and foreclosure activity to continue, but there are glimmers of hope. California Building Industry Association Chief Economist, Alan Nevin, projects a more optimistic scenario with resolution to the credit crunch and gradual increase in the total number of new homes produced.
For Riverside County, Nevin predicts that the collective efforts of government, industry and increased consumer education will bring stability to the mortgage industry. Increased regulation and market forces will make lending standards tighter, but consumers will adapt to save more and better protect their credit scores. Additionally, Nevin believes the Inland Empire will see a modest increase in new home construction by about 4,000 units in 2008 - the first increase in three years.
The good news: demand for homes remains high. According to the California Department of Finance, Riverside County is experiencing the fastest population growth in the state and we know from a recent survey of California's fastest growing community - Latinos - that nearly all non-homeowners want to own a home. Unfortunately, almost all new homes remain unaffordable to first-time homebuyers. Hidden costs such as fees, minimum square footage requirements and extravagant community amenities ensure that just the cost of a dirt lot and its requisite permits can cost well over $200,000 before the home is even built!
For first-time homebuyers the picture is more optimistic. Existing inventory offers consumers significant amenities for the price and new, entry-level homes are becoming a focus for homebuilders. For many families, 2008 will be a great year to buy.
Unfortunately, the forecast for government is not as bright. The lag between economic recovery and the benefit to government means that budgets will be challenged. The troubles from 2007 are only now affecting government revenues. The state is facing a $14 billion deficit and local governments throughout Riverside County are cutting spending. While the situation is difficult, local governments have a golden opportunity to invest accrued monies, such as the local Transportation Uniform Mitigation Fee, in infrastructure. In fact, hundreds of millions of dollars are available for roadway improvements and construction to benefit current and future residents.
More importantly, local government has an opportunity to help spur economic growth by removing barriers to homeownership. Reducing bureaucratic hurdles, supporting increased housing density and reducing homeownership fees, which add an average of $50,000 to the cost of each new home, will enable local families to buy homes and fuel our economy.
The bad news for 2008 is that the economy may struggle, but the good news is that by the end of the year it will show signs of improvement. Perhaps the best news is that planning for our future and promoting homeownership will ensure long-term prosperity for families and the local economy.
Bob Yoder is president of the Building Industry Association of Southern California's Riverside Chapter.
February 2008 Issue