Bruce Norris is joined this week by Dr. John Husing. Dr. Husing is a leading authority on the Inland Empire economy, an area he has been studying since he wrote his doctoral thesis on the region in 1964. His influence on the business and political landscape has been so extensive that the LA times named him one of the 100 most powerful people in Southern California in 2006. He is the writer of the Quarterly Economic Report, an economic newsletter now in its 20th year. His company, Economics and Politics, Inc, provides consulting services for municipalities and services with economic strategies, statistical data packages, recommendations for public policy and presentations to businesses and political leaders about the nature of growth and economic trends in Southern California. His website includes copies of his newsletter, Power Point presentations of various speeches and photographic glimpses of his exotic travel adventures.
Bruce asked John about his latest exotic travel. He was on a 24 day trip from Tasmania to the deepest penetration you can make by ship into Antarctica. They crossed the southern ocean, went through the ice flows for six days, got into the rough sea, and went down to where the huts were set up by explorers in the early 20th century. There were actually 90 people crazy enough to go with him on this trip. John was quite adventurous when he was younger; he even jogged through African in lion territory. This was one of the dumber things he said he did was when he was in his thirties. He actually ran 8 ½ miles through this territory that had the heaviest concentration of lions. Now nothing in his professional career would lead anyone to believe he had done any of these things. In those days he was running miles at 7 miles a minute; and two miles after his truck caught up with him and got him on it the drove by a lion that came right up beside them and took a swipe at the truck.
Bruce really enjoys John’s website since it is very informative and has a great quarterly newsletter. He does all of his presentations and has all of his charts here. One of his charts showed an emotional journey where you have these cycles. When we were in 2005 and 2006 there was a point that was the “point of maximum financial risk.” Bruce asked John if his sense is that at the point of maximum financial risk you are also at the point of euphoria for what you have just experienced and likely to ignore. John said they are not up to this point yet. When he started using this chart, the cycle on it starts at depression, goes to hope, then to relief, then optimism, and finally excitement. At this point he believes we are approaching excitement since the economy in 2013 did incredibly well. When we get to the revised data in the first week of March, we will find that 2014 was equally strong. This is really important information for where we are and where we are going.
In 2013, we created 46,833 jobs. In 2014, the preliminary data says 32,000, but he thinks when they revise it that it will come out closer to 50,000. With the 46,000 job figure, the preliminary data only said 14,000. This is why he believes we will see an increase. Those two years would mean the Inland Empire is beginning to act normally, which makes it one of the strongest economies in the state. Bruce said when you look at this chart, one of the things that strikes him is it seems like that progression is historically true and sequential in nature. You usually do have that process, and when you get to the excitement stage you rarely go back to the hope stage. You first have to reach the euphoric stage. Usually at this point people are starting to make unwise decisions.
Bruce has noticed that in real estate you will not only have a rationalization of what a lender would loan you, but you would also have a rationalization of what you are willing to spend as a portion of you budget. You will also drive the furthest ever at the peak of a market and say it is okay to drive 60 miles to work. That has been going on in Southern California since World War 2. The way in which the market has opened up is in the 50s, the big hot spot was the San Fernando Valley. In the 60s it was the San Gabriel Valley, and towards the end of the 60s it was getting into Claremont. When you get to the 70s, it is beginning to move into Montclair, into Chino, and into Upland. Similarly, in the early 70s it was getting into Orange County. By the end of the 70s it was seriously into the Inland Empire west of the 15 freeway.
As you move into the 80s it is starting to go over the 15 freeway and moving east. It is usually driven first by housing, and after this you get the population serving jobs. You start to see the retailers, local banks, and consumer service operations grow up, but the primary jobs are still someplace else with commuting going on through that whole period. A little later you see things change with investors in about a ten-year lag. They begin to bring the jobs a lot of the people moved earlier and are qualified for since these people came for affordable housing and have blue collar type skills. That started in the West End in 1985 when the first warehouse was established. Now there are 99 million square feet in Ontario, and that is a German electrical firm still sitting near the corner of the 15 and 10 freeway. That phase has now moved into San Bernardino, Redlands, and Moreno Valley. Right now with where housing went at the end of the last phase, it was up into the High Desert, out into Beaumont, and down the 215 freeway into places like Perris, Hemet, and San Jacinto. It is a repeating process.
The final stage of it when the area grows up is when the high end housing moves. This is what we saw happening in the last cycle on the West End. The high end housing went into the arc that starts in Rancho and curves around next to the borders of the two counties and into Corona. It made perfect sense to Bruce when he heard John put these two pieces of the puzzle together due to him having looked at this since the 1960s. Real estate prior to 1970 for California versus national price was almost on par. In the 70s, we all of a sudden took off like we were on a separate planet. John this occurred as a result of population growth. At this time the baby boomers really hit the markets when there was a young population in Southern California. He used to laughingly say in those days that the world was tilted to the West and the South. A lot of it was migration back when there was a lot of this. We still have a lot of population growth, but almost all of it now is immigration versus domestic migration.
If you look in the last 14 years, from 2000 to 2014 overwhelmingly the growth is just down. Net migration is just slightly positive, including both foreign and domestic. Bruce asked what year recently we were on the first leg of excitement. John said it would have been about 2002. We had the great downturn of the early 1990s when we saw cutbacks. In real estate, that difficulty lasted until 1997. You then started to see growth, but it was slow. In 2001-2002, you saw it take off again. By the time it got to 2005 it was insane because it took off too hot. Some of the problem they ran into were really the 2006-2008 period of time.
We had a growing economy that was very healthy from 2000-2004, yet we had about a $30 per barrel oil price. At this time we also had a strong dollar, so Bruce wondered if these two things are connected. In other words, do a strong dollar and strong economy equal low oil price. John said not necessarily. The reason we have such a strong dollar right now is the United States is the strongest economy in the investor and modern upscale world. We are pretty much it in terms of an economy in good shape, but the interest rates are extremely low. However, they will likely start drifting up here before this year is over. In the rest of the world and other major countries, including China, Japan, and Europe are not in good shape. As a result of this and with the US as the world’s reserve currency, a lot of money is being stored in dollars in our Treasury bills is because it is safe, there is some return on investment, and it is in an economy that is in fact in good shape versus everybody else. This makes the dollar very strong.
There are good things and bad things about this. It is good for Southern California because it means imports will be very strong. Everything the rest of the world sells is cheaper for us. This will propel imports, and imports is one of the things the Inland Empire handles. This is the purpose of all the big facilities we have. Exports, however, which is the manufacturing core of the country, will be hurt. California’s manufacturing was killed off by regulation a long time ago. It is really not growing, and the major ping will be felt elsewhere. When you have a major shift like this where the dollar changes value fairly quickly.
Bruce asked how long it takes to manifest itself in more imports versus less exports. John said it is a bit of a six-month lag and takes a while. The same is true of the decline in oil prices. This has freed up a lot of income, specifically for low income and lower middle class income families. They have not really adjusted their spending yet. It takes a while for that to get into people’s calculus in terms of what is happening.
Regarding oil putting money in people’s pockets, Bruce asked if low price has an effect on the economy or is it the opposite. John said if he was in North Dakota, Texas, or Kern County he would not like it. On the other end, if he is not in those kinds of places it is a bonus. If you take an area like the Inland Empire, this is not a wealthy area. You have a lot of families here who spend virtually 100% of their income on something. If you reduce the price of something major, such as gasoline, it frees up income to use for other things. It is like a tax cut in that it raises the ability for people to stand and raises the level of activity. There is a leg which they have really not seen show up yet. This is interesting because most economists thought they would be seeing it by now and have not seen it show up in the retail data yet.
Along the same vein we have ridiculously low interest rates, which really create affordable housing in a sense. Bruce asked if this is spurring people on to buy or if they are still incapable of getting a yes answer from the lender at this point. If you look at the characteristics of the Inland Empire economy, you would think housing would be booming out here right now. In perspective, the middle-price house in LA is $481,000. In Orange it is $678,000, while in San Bernardino County it is $255,000 and Riverside it is $305,000. There is an enormous potential in saving for people who migrate to the Inland Empire and buy.
Our affordability rate for people who live here compared to the people who live here is at a 47% affordability rate. A perfect would be 50, where 50% of the families can afford 50% of the houses. It is 25% more in San Diego and only 20% in Orange. If anybody wants to buy, 80% of the families in Orange County can’t afford the middle-priced house. 75% is in LA in San Diego. Why they are not doing it is really an interesting question. John thinks it is a combination of things, but a major part of it is lending, which is not occurring. The higher the FICO scores in order to qualify, the more difficulties that have been thrown in people’s path by Fannie Mae and Freddie Mac. This is especially true for the requirements on FHA lending, although the last few are starting to loosen. FICO scores are still there, however.
However, there is another element in all this that you cannot measure: fear. John thinks people are a little bit afraid. We have been into this recovery period where optimism really starts to penetrate into people’s behavior. This is what is holding up a real recovery in real estate. John was born in 1941, and his mother and father went through the Depression. They did not buy a suburban house until 1955, long after the Depression and war behind us. John thinks there is a similar phenomenon now where people hurt by the Recession are being very conservative in their spending behavior. There are some people who discount this saying their last experience was not a depression. However, if you did not go through the Great Depression and this was the worst thing you ever experienced, it could have had almost the same effect of making you very cautious.
The unemployment rate in the Inland Empire is 15%. The year he was born in the last year of the Great Depression, it was 14.3%. The Inland Empire really had a Depression, and the real estate sector went completely into a real depression. We lost half the jobs in the sector during that downturn. One of the charts he uses in his presentations showed how we have gained back greater numbers of jobs than what we lost. John said this is true for the country and state, but in the Inland Empire we will cross the threshold this year in 2015. The two big years, 2013 and 2014, will get us about 10-12,000 jobs. This year we will probably add another 40+ and be out of the hole finally. Contrary to what you may hear, the mix of jobs we have in the country is similar to what we had prior to the recession with logistics replacing construction for the blue collar workers wanting decent wages.
Bruce asked what kind of jobs come under the heading of logistics. John said this is everything from somebody starting out at $11.50 an hour and those doing a very elementary task. If you stick in the sector and go up with it, the middle income within the sector is $44,000. A truck driver driving a heavy-duty truck have a median half above/half below $43,500. You have people in warehouses who have the ability to handle any of the computerized operations, and they do well. This is the type of sector where if you get in it and learn the technologies within it, you can do very well. If your wife is in another sector where they are working in retail, that family would be making $65-$70.
The logistics of a sector have two basic functions that we see in the Inland Empire. One is the truck drivers, and the other are the people working in the large warehouse facilities handling the cargo. More and more of what is going on inside the buildings is being driven by technology. There are robotics involved, everybody is driving a fork lift, and computerized controls are becoming more serious. There was a picture on his website of two companies, Amazon and Macy’s, in order to make his point about logistics. He tells people to look at the labels on their clothing, appliances, and shoes and see where things are made. These are all imports, and this is what consumers are buying. This comes into the ports, gets moved in by truck into the facilities, gets managed here, then leaves to either be circulated with retailers across the Inland Empire and Southern California as a whole or go across country to various places that have distribution centers. The other group are those who buy online and not going to the store. With this you have these big warehousing operations where the things you are buying are coming out of and being delivered to you. This means a lot of the cargo has to go to them in order to do that. If you are buying online, you are helping to drive those big facilities. These could be 750,000 to 1,800,000 square foot buildings. There is a lot of employment inside of them because there are a lot of touching of product since there are so many different things people will put into an order. It is very difficult to really computerize all that.
For more information, you can visit John Husing on his website at www.johnhusing.com. He is also the chief economist of the Inland Empire Economic Partnership, and their website is www.ieep.com. Tune in next week as Bruce continues his discussion with John Husing.