Growing Pains: Challenges to Re-Imagining Economic Growth in the Inland Empire

Growing Pains: Challenges to Re-Imagining Economic Growth in the Inland Empire

S. E. Williams

Last Wednesday, leaders from across the region gathered at the 8th annual Inland Empire Economic Forecast Conference at the Riverside Convention Center to consider the region’s economic forecast. 

In addition to acknowledging the inland region’s steady economic growth, conference participants discussed the mounting labor shortage and slow-down of the area’s job market. There was also an in-depth discussion about the Inland Empire’s ongoing urbanization and how the area can grow to best serve the community’s residents and businesses. 

The report’s economic outlook projected job growth will remain steady over the next couple of years, then begin to taper down to the 2 to 2.5 percent range as the supply of available labor declines. 

The bright light is that after years of stagnation, the tightening labor market pushed average annual wages in the region up by 6.5 percent between the first quarter 2016 and the first quarter 2017. 

In other encouraging news, the state and the region are expected to experience continued economic growth and jobs throughout 2017 and 2018. Most job growth will occur in healthcare, leisure, hospitality, and construction. 

A five to six percent increase in home prices in the Inland Empire is forecasted to occur over the next two years, driven by a tightening in the area’s housing supply, in addition to a renter population that continues to occupy a growing share of single-family dwellings. 

The region’s economic experts believe one of the best signs the economy continues to recover is the amount of spending done by business. However, consumers are predicted to rebalance through this year, as spending continues to run ahead of income, following the trend of recent years—nationally, the consumer savings rate versus disposable income dropped below 4 percent for the first time since the Great Recession.

Commenting on the region’s economic future, one of the report’s authors, Christopher Thornberg, Director of the Center for Economic Forecasting at the UC Riverside School of Business, noted, “Short of some major change in government policy, there’s nothing on the near-term horizon that has the capacity to knock the nation’s economy off its steady, upward trajectory.” He then cautioned, “But there are burgeoning trends that could hold back the economy, like the shortage of workers, which is something that will limit employment as well as business profits and growth.” 

The anticipated shortage of workers will primarily be driven by a shrinking housing supply. According to the report, the region’s housing market has changed in some very significant ways. Primary among them is the inflow of households into the rental market driven by the foreclosures that occurred during the Great Recession; a shift from younger to older householders; and, a low level of residential permitting activity, even with an uptick in economic activity. 

Unsurprisingly, the report focused on rolling back regulations at both federal and state levels as to reverse this trend. Those efforts, of course, would be conducive to increased building activity at the local level. 

An important advantage the inland region has over coastal communities is affordability. As the California Association of Realtors recently reported, during the first quarter of 2017, here in the inland region, at least 43 percent of households could afford to purchase the area’s median priced home. In Los Angeles, only 29 percent of households could afford to do so; in Orange County, it’s only 21 percent who could afford to do so. 

Also during this time, the minimum income required to purchase an average home in Riverside County was $75,000 and $53,000 in San Bernardino County. The counties of Los Angeles and Orange were $100,000 and $154,000, respectfully. 

In the coming years, this fiscal advantage will certainly work to the inland region’s benefit. As the state’s population grows in the southern region, more people will look to move east, enticed by the low cost of housing. Yet, this benefit presents the region with its greatest challenge—can the Inland Empire build enough houses to meet the growing demand? 

If the past is prologue, the challenge may be greater than some might think. According to the report, “Between 1995 and 2000, nearly 334,000 new households entered the Inland Empire and 79,000 single-family permits were issued. Over the next five years, this increased to more than 600,000 new households and nearly 179,000 permits.” 

The development process slowed during the recession and now, ten years in its wake, the area is yet to show the rebound experienced across the rest of the economy. In fact, data indicates current building permit activity appears stalled at levels not experienced since 1995. 

As the overall economy continues to improve and housing prices continue to rise in California and across the nation, the inland region is well positioned for another significant population influx; however, it will only be able to experience it if it can build enough housing.

Even as area leadership works to resolve the issue of available housing stock, potential buyers are still wrestling with mortgage lending standards that are so stringent, potential homebuyers are being forced into the rental market, which continues to escalate in the inland region. 

Once again, the report pointed to regulations as the culprit. At the federal level, Dodd- Frank regulations implemented by Congress in the wake of the recession were designed to protect borrowers from the abusive practices of lenders that led to the greatest recession in modern American history. The protections provided to consumers under this policy are the chief culprits now being blamed for making mortgage loans difficult to attain. 

At the state level, public policy was identified as another impediment to progress. Since its passage in 1978, Proposition 13 has severely limited local revenue from property tax assessments and caused local governments to delay residential construction, while also pushing for the kind of developments that can generate greater tax revenue streams. This has resulted in local governments tacking fees onto residential developments to raise additional revenue. 

Another impediment to residential development is California’s Environmental Quality Act (CEQA), passed in 1978, which limits property tax assessments and creates the same tendency for local governments to tack on fees to raise revenue as Proposition 13. 

Prop 13 also increased the cost of residential construction, mandating that developers mitigate any disruption to the environment. The report asserted CEQA has had a detrimental impact on development across the state. 

In summary, the housing market in the inland region continues to face these challenges. It must find a way to make it easier for younger families to purchase homes, and when that issue is neutralized, there is still the growing need to build more residential units in the inland region. The report suggested the best way to break through these barriers is to champion public policy reform at the federal and state levels. 

The report continued, “The private housing financing system has virtually disappeared and the government system that remains is pursuing the same policies that produced the current problems.” The collapse of the housing market as a result of private and public mortgage financing schemes were what drove the passage of Dodd-Frank legislation. In essence, the legislation was designed to prevent future meltdowns of the housing market and by default the financial ruin of Americas families.

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