Posted on 12/14/2008 7:34:35 AM PST by WayneLusvardi
As California’s economy falls into a deep recession from the bursting of the global real estate bubble, it would behoove everyone to understand how local policies also contributed to the bubble in the first place.
To liberals the recent real estate bubble was caused by Wall Street financial deregulation; to conservatives by over-regulation from anti-red lining lending laws of the Community Reinvestment Act which forced banks to make sub-prime loans to former renters who could not otherwise qualify for conventional loans. Both point fingers at each other over the 1999 bipartisan repeal of the 1933 Glass-Steagall Act II which separated commercial and investment banking to prevent speculation.
However, to make the big bubble of global financing work, many state and municipal governments had to create a smaller local bubble by re-zoning land for an expanded supply of housing; as well as enacting ordinances to reduce apartment rents and prices of homes for low income persons needing sub-prime loans. The social policies of mandated affordable housing quotas and Inclusionary Housing were such mechanisms. These two local policies unintentionally created a bubble within the larger bubble and led to our national financial crisis.
For example let’s take the City of Pasadena which is widely known from the popular Rose Parade and Rose Bowl. Similar Inclusionary Housing regulations in Pasadena apply in 107 cities in California and many other communities across the United States.
Pasadena is a suburb of Los Angeles and has a population of about 145,000. The regional planning agency, an arm of the State legislature, requires Pasadena to produce 2,869 units of affordable housing by 2014 (478 units per year) through what is called a Housing Element plan. The major way to do this in Pasadena is through its Inclusionary Housing Ordinance which requires developers to build one affordable housing unit for every five units (20% affordable set aside), subsidized by the owners or renters of the other four units.
Inclusionary housing inflates housing prices as 4 out of every 5 new units will have their prices or rents hiked about 25% above the market price to subsidize each affordable unit. This price and rent inflation eventually ripples out to surrounding housing stock. Call it a hometown affordable housing-induced real estate mini-bubble. But this smaller price bubble was responsible for only a small portion of the bigger real estate price bubble which occurred from mid 2003 to mid 2007. Typical home prices in Pasadena tripled during the swelling of the global real estate bubble (a 200% increase).
Perhaps more importantly, to produce 2,869 affordable units in Pasadena by the year 2014, 11,476 market rate units will have to be built (1,912/units/year). This will require more sub-prime loans.
It will also result in a population increase of about 35,000 nearly all to be concentrated in downtown Pasadena. In other words, the cart is before the horse with local zoning for both affordable and market-rate housing. It is affordable housing quotas coupled with Inclusionary Housing laws that drives the need to build more market-rate housing in communities which have adopted such policies. There is nothing that can be done about this out of control policy - it is on auto pilot like much of the state and federal government.
The State of California doesn’t include older low income housing stock in its affordable housing quota formulas. Over 25% of Pasadena’s residents are deemed by the U.S. Census Bureau to be living in poverty but somehow find “affordable” housing. Neither does the Bureau of Labor Statistics, State of California or the City of Pasadena consider that low income people typically underreport their incomes by up to 25 times (source: Anthony Downs, Niagara of Capital, 2007, p. 107).
Coincidentally, Indy-Mac Bank, a government created mortgage lender headquartered in Pasadena, was put into conservatorship in mid 2008. The infamous actions of U.S. Senator Charles Schumer (D) incited the local Pasadena newspaper to run stories about Indy-Mac causing panic and a bank run.
Since Indy-Mac Bank was put into conservatorship, the national economy has suffered historic job losses and the Big 3 auto makers are pending going out of business or restructuring through bankruptcy unless there is a Federal bail out. Concurrently, the California state budget has amassed a $41 billion deficit. In Pasadena, Indy-Mac Bank has laid off 3,800 employees. The local Ford auto dealership has closed and their property along the route of the Rose Parade sits conspicuously vacant. The economy seems headed in a downward spiral.
All this hasn’t deterred the City of Pasadena from continuing to pump up the political air compressor which has inflated the local real estate Bubble Machine. In December 2008 the City of Pasadena has established a new Housing Department to produce more affordable housing. It has rushed to adopt a new Housing Element to its General Land Use Plan to comply with the requirement to build 2,869 units of affordable housing needing more sub-prime loans.
Heritage Square, a proposed 134 units low and moderate income housing project, sat uncompleted for years while the City Council struggled over the selection of a “politically correct” minority developer. Hundreds of new units of condos and apartments sit vacant in the city’s downtown core, reflecting the sucking sound of the puncturing of the real estate bubble. In February 2008, Pasadena leased its obsolescent power plant to the Art Center College of Design for $1 per year for student housing and possible classrooms.
Pasadena’s new Whole Foods Market and Office Max stores are reported to be retail chains that might fail during the Recession. A rumor around town is that an auto dealer had to immediately repossess 150 brand new cars sold last month due to changed lending standards.
In Pasadena one can get a subsidized loan for uneconomic solar panels on one’s roof, or a land write-down for affordable housing, but not conventional financing for a car or business. Is it any surprise that the Economic Development and Employment Element of its General Plan has not been updated since 1987?
But not to worry, Pasadena is rushing to get its new Housing Element Plan implemented, a new Housing Department director hired, and implement a $330 million school renovation bond issue (Measure TT) to stimulate the economy to hopefully raise home prices; all in vain in a deflating real estate bubble. Not to be outdone, California Governor Schwarzenegger authorized spending $73 million in July 2008 as part of California’s tulip-bulb craze for, yup, more affordable housing.
Look no further than here in Pottersville, er, Pasadena, not Wall Street or D.C., as to why we're in the mess we're in where affordable housing runs both the economy and government, mortgage banks are being taken over for making bad sub-prime loans, and auto dealerships are dying along Colorado Boulevard, the route of the Rose Parade.
Pasadena’s story may be an update on the movie It’s a Wonderful Life complete with bank runs, an uncompleted Bailey Park housing project, and Pottersville, a downtown “urban village” with vacant new condos and apartments and rising crime from relocated low income residents.
But unlike the Wonderful Life movie, in Pasadena the roles are reversed. It is not a Scrooge-like banker Mr. Potter who wants to end the "sentimental hogwash" of home loans for the working poor that is the problem. It is government itself at all levels which has over-invested in housing to the detriment of its businesses and industries. Housing cannot run a local or national economy in the long run. And in California Inclusionary Housing located in urban infill locations is environmentally non-sustainable as it increases dependence on imported water supplies from the Sacramento Delta and Colorado River.
It is over-regulation, not deregulation, of the local housing market that has inflated the real estate bubble economy. But don’t tell any of the Progressive elites in Pottersville, er, Pasadena that. To them the real estate bubble has been created elsewhere by the capitalist vices of greed, fraud, and duplicity. The Wonderful Life movie currently being played out in Pasadena isn’t ending so wonderfully however.
Interesting facet of the problem. No gubmint deed goes unpunished.
—bflr—
California must build housing for its conquerors from Mexico.
Agreed.
Top it all off by historically low interest rates and money being pushed like flood-water through these channels of Fannie/Freddie, CDO’s, Community Reinvestment Act, etc... that we built.
It is increasingly unpleasant to live in California. I went to a local Burger King last week to buy a gift card. The entire staff could barely speak English. It took them forever to find the gift cards (which had a scratcher on them to possibly win a Wii system) and then load the amount on the card. I bought two thinking that it would be fun for the recipients to scratch the card and try to win a Wii.
When I got home, I opened the gift cards to sign them. Guess what- the scratcher cards had already been scratched to reveal they were losers! They made sure they were selling me losers and have probably gone through the entire box of scratchers to find the winners for themselves.
This may not seem that bad, but there are a hundred little incidents like this a day. The quality of life in Southern California is plummeting.
I would complain to national headquarters about this local McDonald’s franchise. Don’t take this crap.
“The quality of life in Southern California is plummeting.”
I was born and raised in Southern California, but I left there for good in 1979 when I was 28. Now I only go back for weddings and funerals and a reunion once in a while, but it’s like going to a third-world country. I will never live there again. I left in 1979 because it had got so bad; nowadays it is light years worse.
“...prices or rents hiked about 25% above the market price to subsidize each affordable unit.” If the units are 25% above the market price they won’t sell or rent. If they sell or rent then, by definition, they are not above the market price. If they don’t sell or rent and are truly above market price I’m wondering how Pasadena will build subsidized “affordable” units if there are no developers willing to build unsaleable housing?
I went to their website. No place to contact them via e-mail. I tried their corporate office and consumer phone numbers. The recordings say to call back during business hours... oh, and if I want to continue in English, press 1.
Moral of the story: Very unresponsive website, poor employee ethics, English is an option, “global” mentality. Don’t invest in Burger King, folks.
I am a native Southern Californian too. These days, we are simply buried under unskilled, uninsured, uneducated, unassimilated, and unethical people.
My husband and I would like to move! Any suggestions?
Without regulations to the contrary, market forces will constantly prevail, thus bubbles are small and pop quickly, with prejudice.
The global real estate bubble created a “build it and they will come” business philosophy. That is why new housing inventory is sitting vacant now that the music has stopped. Even as I write, new condos and apartments are being erected in Pasadena with one out of every five units a low income unit. I wonder if it is possible to file a class action suit alleging that City forced inflated priced units which can’t be sold?
“My husband and I would like to move! Any suggestions?”
Dixie.
Great article. Thanks for posting this!
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