Housing bubble in the Inland Empire? Here's what the numbers say

Demand for single-family homes in the Inland Empire has fueled the strongest building activity in nearly a decade, according to a new report from UC Riverside, though experts say the recent spike is nowhere near the intensity and volume of the mid-2000s.

Construction on single-family homes construction in the region hit its highest level for a single quarter in nine years, at 2,182 units, in the first quarter, according to the UC Riverside Center for Economic Forecasting and Development at the UCR School of Business Administration.

The last time single-family home construction was that high was in the first quarter of 2008, when 2,242 units were constructed,

"The construction is still moving up, but at a very measured and cautious pace," said Robert Kleinhenz, executive director of research at the UC Riverside Center for Economic Forecasting and Development.

The high-flying aughts

The new homes represent a small fraction of the numbers prior to the recession, when the average mid-2000s quarter would see construction of 9,000 to 11,000 homes.

"We're still well below those prior years when there were 35,000 or 45,000 built in the Inland Empire, over the course of a year, but here in 2017, we probably expect 10,000 units built for the whole year," Kleinhenz said.

"That's probably the same amount in a single year than what was built in a single quarter in 2005," he said.

The total housing market

Looking at the home-buying market as a whole Inland, the median price of an existing single-family home increased to $322,000 in the first quarter this year, or 9 percent higher than the same quarter in 2016, according to the report. Sales of existing homes also increased during that time, with 14,840 homes closing escrow in the first quarter of 2017 on a seasonally adjusted basis, or about 8 percent more than 2016's first quarter, according to the report.

Homeownership in the Inland Empire, according to the report, has continued to rebound, reaching just over 61 percent in the first quarter of 2017 — nearly matching the national level of 64 percent and above the state's 55 percent, according to the report.

Where does this leave millenials?

So who's buying the new single-family homes? Not millennials or young first-time homeowners, experts and developers say.

"These are probably homes for move-up buyers who feel they need more home than they would be getting in the coastal counties at the price points available in the Inland Empire," Kleinhenz said.

Many millennials are still putting off marriage, which often translates to a two-income household and good credit, often necessary to purchase a new home, experts say.

The market of first-time homebuyers is on the low side, said Gerde Welke, associate professor of finance, real estate and law at Cal Poly Pomona.

"With millennials, the main problem is, it used to be three years ago, it was temporary jobs versus permanent jobs," Welke said. "You couldn't purchase a house unless you had a good solid job. That's changed, so the millennials are getting better paid employment."

But the wages are trailing the growth in home prices, Welke said.

"Eventually at some point, if prices continue going up, then there will be no buyers, so prices will have to correct, and in the long run, it's wage growth that is called for."

It's not all rosy for developers

Adding to the cost of new homes are legal challenges under the California Environmental Quality Act, or CEQA, which sets forth rigorous development conditions and approval process, builders say.

"It takes longer to get land (entitled) to market, and there wasn't as much CEQA litigation," said Randall Lewis, principal of Upland-based Lewis Group of Companies, which has built a number of housing and commercial projects in the Inland Empire. The company is currently partnering to build the Park Place community in the Ontario Ranch area. "It was just easier to process 10 years ago."

Lest anyone fret of unsustainable highs, the spike in construction is nowhere near housing bubble territory, Lewis said. The rate at which developers are pulling permits is still less than half what it had been at the height of construction, experts say.

"We don't anticipate over-supply," Lewis said.

Kleinhenz agrees.

"Because the pool of qualified borrowers under the current tight lending standards are not nearly what it was a dozen or more years ago, that's keeping any chance of this becoming a housing bubble under wraps," he said.

Interest rates, relatively low today, should rise in the near future, experts say.

"I think it will cause potential homebuyers to realize now is a good time to buy, and the builders are going to want to make hay while the sun is shining.

"And in 2017, the sun is shining," Lewis said.

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