UCR’s Center for Economic Forecasting says the region’s housing problem is a land use issue solvable at the local level
“It shouldn’t be about country club California. This should be a California everyone can live in,” said Christopher Thornberg, director of the UC Riverside School of Business Center for Economic Forecasting and Development, neatly summarizing the theme of the center’s 2019 annual conference.
“The House That Wasn’t Built. Housing Scarcity: The Inland Empire’s Natural Barrier to Economic Growth” was held Nov. 6 at the Riverside Convention Center. It coincided with the release of a new economic forecast for the U.S., California, and Inland Empire economies.
Thornberg said that contrary to the bleak vision of inland California embedded in some statewide economic development agendas, the Inland Empire, which consists of Riverside and San Bernardino counties, has a robust economy and the 14th largest labor force in the nation. Over the past five years the Inland Empire joined the Bay Area in fastest job growth in the state. The region’s unemployment rate of 4% is the lowest it has ever been, equaling that of Los Angeles, and it has the same income per level of educational attainment as Los Angeles and Orange counties.
However, while coastal areas boast large, highly paid professional and technical sectors, healthcare, government, and logistics dominate the Inland Empire’s economy. These jobs often require less education and fewer skills, and generally pay less than jobs in technology, finance, and educated professions that lead the coast.
Rather than regard this as an impediment to developing the kind of economy found in coastal California, Thornberg suggested the Inland Empire’s labor force and housing supply have been necessary supports to California’s growth all along and comparison to coastal areas is both methodologically unsound and unfair.
“Comparing local economies to San Jose is like comparing your health to an Olympic athlete,” Thornberg said. “The only place that looks like San Jose is San Jose.”
The housing supply, however, has not kept pace with the population, which over the past 25 years has grown three times faster than that of the coast. Apartment vacancies, for example, are at less than 4%. The region is not building enough housing, and neither are Los Angeles and Orange counties. This situation will increase regional competition for housing that is already pushing out the Inland Empire’s workforce as housing grows scarcer and rents rise. While some worry the rich are leaving California in droves, far more people at the other end of the spectrum are abandoning the state for places like Nevada and Arizona, where housing is available and affordable.
The Center for Economic Forecasting’s analysis indicates a crisis of housing supply, not affordability. California has the second lowest vacancy rate in the nation and the highest percentage of adults living with parents. Thornberg said California needs to be issuing 200,000-250,000 building permits per year to sustain a 2% job growth rate but is only doing 130,000.
“Lower-skilled workers moved inland because coastal areas put the kibosh on housing 20 years ago,” Thornberg said. “It’s like we’re saying, ‘We already kicked you out of the coastal areas; now we want to kick you out of the inland, too.’”
The center’s analysis finds the housing problem is a land use issue that needs to be solved at the local level. Thornberg said a poorly thought-out tax model exacerbates the housing crisis. Most city revenue comes from business taxes, which encourages local governments to invest in business development, not housing. If cities have to build housing, they want it to be high-end and often enact restrictive laws to prevent high-density alternatives that attract lower-income occupants, like apartment complexes.
“The decisions that need to be made to continue amazing growth in the Inland Empire are local,” said Thornberg. “We need to start having these land use conversations and making decisions.”
Download the economic forecast: https://ucreconomicforecast.org/wp-content/uploads/2019/11/2019_IE_Economic_Forecast_Book_Digital.pdf
About UC Riverside
The University of California, Riverside (www.ucr.edu) is a doctoral research university, a living laboratory for groundbreaking exploration of issues critical to Inland Southern California, the state and communities around the world. Reflecting California’s diverse culture, UCR’s enrollment is more than 24,000 students. The campus opened a medical school in 2013 and has reached the heart of the Coachella Valley by way of the UCR Palm Desert Center. The campus has an annual statewide economic impact of almost $2 billion. To learn more, email email@example.com.
Demographic Dilemma: Slowing Population Growth, Not Pandemic, At The Root Of U.S. Worker Shortage
Ability To Meet Current, Future Demand Challenged; Problem Magnified In California Due To Housing Scarcity
Supply chain struggles have been widely blamed for the inability to meet consumer and business demand throughout the pandemic. While fixing the supply chain should be a top priority, it is worker scarcity, driven by the lack of basic, long-term population growth that is the true underlying cause—and a critical future challenge for the economies of the United States, and particularly California, according to a new analysis released today by the UCR School of Business Center for Economic Forecasting and Development.
“For several decades there has been a substantial slowdown in the growth of Americans in their prime working years,” said Christopher Thornberg, Director of the Center for Economic Forecasting and the report’s author. “Whether it’s the missing factory worker, delivery truck driver, or salesclerk, the scarcity of workers is hindering the ability to connect demand to supply and is slowing economic growth.”
According to the analysis, long-run population growth of people between the ages of 25 and 54 accelerated dramatically in the U.S. in the 1970s, peaked in the mid 1980s at over 2% growth per year, and then collapsed just as fast, driven by sharp declines in birthrates. International migration into the United States jumped in the 1990s, offsetting some of this baby bust, but that too slowed sharply after the turn of the century. Today, the population growth rate of prime working age people in the nation is 0.2%, one-tenth of what it was 40 years ago.
Thornberg notes that these population trends have been observed in the data for many years, but because it’s the kind of thing that happens gradually, the issue simply hasn’t been a primary focus for policymakers or business leaders.
The mass wave of retirements that occurred during the pandemic both accelerated and exacerbated today’s worker shortage, but it is not the root cause. “This is a long-term demographic problem, not a short-term cyclical one,” said Thornberg. “It is not going to disappear as the COVID crisis fades.”
As bad as the labor shortage is nationally, it is worse in California, especially Southern California, according to the analysis. The state’s lack of housing acts as a functional cap on population and labor force growth, degrading affordability and driving workers and businesses to other locations. Moreover, the state’s demographic forecasts do not paint an optimistic outlook for future trends.
According to the analysis, all of this means government agencies and policymakers need to concentrate on increasing labor supply and helping employers adapt to a new world where workers are a scarce resource. In the immediate term, there is a relatively passive way leaders can help: they can relax labor market regulations to allow employers maximum flexibility in how they hire their workforce.
Specifically, the analysis calls out the following:
- Restrictions on gig work and flexible work schedules should be reduced, not heightened as California is currently doing.
- Older employees who wish to remain active in the labor market should be encouraged and supported by reducing or eliminating potential reductions to existing retirement benefits.
- Regulation should shift to allow employers to offer a variety of wage/benefit/training packages depending on worker desires rather than being based on preset publicly mandated minimums.
- Policymakers should relax licensing requirements and staffing rules.
In the longer-term, elected and regulatory officials can make a difference in numerous ways:
- At the national level, Congress can address broken immigration policies and work to allow more people to legally move to the United States.
- State and local leaders in California can expand housing supply, particularly multifamily housing, to slow out-migration.
- Policymakers can increase earned income tax credits to support workers in moving off public assistance into lower-wage, lower-skill jobs.
- Government leaders can subsidize employer-based worker training programs to allow and encourage lower-skilled workers to enter higher skilled career paths.
- Policymakers can invest in Pre-K education and publicly subsidized childcare facilities to help workers (particularly women) remain on their chosen career path as they build families.
- Government can provide grants and training to assist small businesses in adopting labor saving technology.
View the report, The Big Shortage: California’s Worker Scarcity and Economic Growth, here.
Inland Empire Business Activity Still Going Strong; Region’s Performance Starkly Contrasts Economic Slump At National Level
Investors Buying Up More Housing Stock Than Ever Before
Business activity in the Inland Empire has continued to grow, and in the context of today’s increasingly uncertain economic environment, stands in stark contrast to growth trends in the nation, according to the new Inland Empire Business Activity Index released today by the UCR School of Business Center for Economic Forecasting and Development. The region’s economy officially transitioned from recovery to expansion in the fourth quarter of 2021 and growth is forecast to continue throughout 2022.
In the first quarter of 2022 (the latest data available), business activity in the Inland Empire expanded by 4.7% compared to 6.4% in the fourth quarter of 2021. Although regional growth has slowed somewhat, it unambiguously outperformed U.S. GDP, which declined by 1.5% in the first quarter. Moreover, the regional slowdown is to be expected as the local economy has reached and surpassed pre-pandemic conditions. Over this year, the Inland Empire’s business activity is forecast to rise between 2.5% and 3.5%.
“Despite greater instability in the macroeconomy today, there are still very few, if any, signs of weakness in the Inland Empire’s economic activity,” said Taner Osman, Research Manager at the Center for Economic Forecasting and one of the Index authors. “Employment has continued to expand and the workforce in the region is now larger than it was before the pandemic, something that is not true for the state as a whole.” Osman cautions, however, that while momentum still exists, the Inland Empire will eventually share in the effects of the broader economic contraction, but not likely in 2022.
The new report also calls out the hot, inventory-constrained local housing market. According to the analysis, it would take 2 to 3 times current inventory levels to move the region out of the seller’s market it’s currently in. The Inland Empire’s high home prices are being driven by a number of other factors as well, including an increase in investor appetite for real estate in the face of a shaken stock market. Investors purchased 17.2% of the homes sold in the Inland Empire in the first quarter of this year, up from 15% one year ago.
“Today, across the entire nation, investors are buying up a larger share of homes than ever before,” said Osman. “Rising mortgage rates should help temper the double-digit price appreciation we’ve seen in the Inland Empire, but at this point we don’t foresee a scenario where home prices will decline, due largely to limited inventory.”
The analysis was authored by Taner Osman and Senior Research Associate Justin Niakamal.
View the new Inland Empire Business Activity Index here.
Affordable Inland Empire? Fewer Than One-Third Of IE Households Can Afford To Buy A Home In One Of Southern California’s ‘Most Affordable’ Housing Markets
Despite Recessionary Fears, IE Labor Market Continues To Show Strength; Demand For Warehouse Space Surges As E-Commerce Spending Continues
Throughout the pandemic, the Inland Empire’s relatively affordable housing market has been a bright spot in the local economy and home price growth has outpaced more expensive neighboring areas. That affordability, however, has diminished in the face of today’s higher mortgage rates and in the context of elevated demand and extraordinarily high-priced markets across the state, according to an analysis released today by the UCR School of Business Center for Economic Forecasting and Development.
Today, only 31% of local households can afford to purchase a median-priced home in the Inland Empire, a decrease from a relatively low 39% in the first quarter of 2021. Still, the region remains one of the most affordable in all of Southern California and is more affordable than the state as a whole where just 24% of households can afford a median-priced home.
“Honestly, this is what affordability looks like in California,” said Taner Osman, Research Manager at the UCR Center for Economic Forecasting and one of the report’s authors. “Housing prices are at the crux of the state’s famously high cost of living and are out of reach to the majority of the population as lack of supply enduringly and severely lags demand.” The contrast with the nation overall, where 45% of households can afford median-priced homes, is stark.
As of April 2022, there were only 1.7 months of housing supply available for purchase in Riverside County and 2.2 months in San Bernardino County. A balanced market typically has 6 to 7 months of supply. Moreover, homebuyer demand, which intensified due to the pandemic-driven economic stimulus, remains high as home sales decrease in the face of limited inventory.
Key Findings Include:
- No Labor Market Slowdown Yet: Despite growing recessionary fears, the short-term economic forecast for the Inland Empire is strong. The labor market continues to show vigor with an unemployment rate (3.7%) that is lower than it was pre-pandemic (4.1%). More than 280,000 jobs have been added in the region since April 2020, surpassing the 228,000 that were lost due to pandemic-related shutdowns.
- Inflation Chips Away At Wage Growth: Local wage growth has been strongest in Riverside County where wages increased 3% from the third quarter of 2020 to the third quarter of 2021 (the latest data available). Wages in San Bernardino County have grown 1.7%. Despite the upturn, real wages decreased during the year due to high inflation.
- Consumer Demand, Fuel Prices Send Taxable Sales Soaring: Taxable sales receipts in the Inland Empire jumped a hefty 23.8% in the latest annual data. The surge has been primarily driven by high fuel prices and more spending in the Business and Industry category where receipts swelled 57%. Fuel and Service Station receipts expanded almost as much (56%).
- E-Commerce Trends Keep Warehouse Space Red Hot: In the last edition of this report, the vacancy rate among warehouse properties in the Inland Empire was an already low 3.6%. As of the first quarter of 2022 (the latest data available), the vacancy rate has fallen to 3.2% despite a whopping 34.6 million square feet of new space coming online. Driven by strong consumer spending in E-Commerce, warehouse space has become increasingly scarce and asking rents in the Inland Empire grew 6.3% in the latest data. But the region is still more affordable than Los Angeles, San Diego, or Orange Counties.
- Rental Market Surges: Demand for apartments continued to intensify in the Inland Empire over the last year with the vacancy rate falling to 3% and asking rents expanding by more than 21% to reach an average of $1,807 per month per unit. But even with the increase, rent in the region is significantly more affordable then in Los Angeles ($2,236), Orange ($2,335), and San Diego ($2,226) Counties.
The new Inland Empire Regional Intelligence Report was authored by Osman and Senior Research Associate Brian Vanderplas. The analysis examines how the Inland Empire’s labor market, real estate markets, and other areas of the economy have recovered from the COVID-19 pandemic and their outlook for the remainder of the year.
The complete analysis is available here.
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