Is Global Money Supply out of Control? - Inflation in the Inland Empire
Chuck Ponzi December 9th, 2005
——————————————————–
in·fla·tion ( P ) (n-flshn) n.
1. The act of inflating or the state of being inflated.
2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
——————————————————–
A great little piece about the Inland Empire Real Estate environment has come out recently. Apparently, the real estate business is still gangbusters out there. Of course, I could have just asked my dad who has gone from being an accountant by trade to being a real estate speculator and flipper.
Stranger than that, the story yesterday was located at this link. However, it has more recently been moved. While ensuring that my mind wasn’t playing tricks on me, I checked back to Ben Jones’ blog where I had come upon the link once, and sure enough, he commented on it, but did not copy the full text of the article. Anyway, his take on the article is here.
It’s pretty much the same sentiment that all locales are sweating these days. It basically says, yes we’re in a speculative era, but we’re different because….
Well, my memory does recall enough to know that it piqued my interest, and there were 3 ideas expressed that I wanted to comment on.
First, the premise was brought forth that prices were so much higher on the coasts than in the Inland Empire and that’s why prices were going to keep going up.
Well… let’s think about that. If we were to extend that further and further, well prices should still be going up in Las Vegas too right? They’re farther inland and well, we all know that money is simply found floating in the ocean and that’s why we all want to live near it.
Second, they mentioned the fast growth of the area in terms of people. Conveniently, they didn’t mention job growth, because frankly, there isn’t enough to support the kind of migration they are having. No, the migration was out of the LA and OC area to escape the high prices of housing. If the Inland Empire is no longer a bargain, what will people do? I guess by their reckoning, they’ll just pay more. Move out of town? Pish-posh, won’t ever happen, California is the Golden State.
Third, and I really wish I had the article because I didn’t copy the quote, but one gentleman quoted said something like “There’s a lot of money out there floating around, and it’s gotta go somewhere.” Well, this one takes the cake. He is right, there is a lot of money floating around out there. And then there is pseudo money, aka Value. The first causes inflation, the second causes optimism.
Let’s define them. Money is the hard stuff that you put in your wallet. It’s also in your bank account, brokerage account, and many other accounts. Value is something money buys. Value is only worth what someone will give in exchange for it (some will argue this about our fiat currency, but we won’t discuss that at this point). Value is a gift card from Home Depot or stocks. Value is your car, your boat, or your house. Any number of events can affect what someone will pay you for items of value. A bankruptcy of a company, car accident, boat sinks, or hurricaine can all change the value of certain items. Money is just there. It floats around in the economy being spent and respent. The speed at which it changes hands is velocity, and the measure of virtual money (not actual currency) is how the Fed determines inflation through M1, M2, and M3 money supply figures.
What’s frightening is that money supply is so out of control that not only can federal reserve bankers see it, little old guys in the Inland Empire can see it sloshing around in their own area.
Kinda like the “you know you’re a redneck if” jokes, there might be a saying like “you know you’re in for an inflationary period when rednecks in the Inland Empire use it to justify half-million dollar stucco boxes” except that it isn’t as funny.
If Bernanke sees what this gentleman has seen, he will most definitely continue to raise rates, and not at a measured pace. The bond market has already built in 2 more quarter point raises, could they be fooled and find themselves on the receiving end of a half-point?
And, if you read my piece on deflation, you might be asking yourself, well, which is it? Is it deflation or inflation? It all depends. Mr. Bernanke has inherited a pretty nasty tightrope walk.
The Inland Empire was doomed about the same time it was dubbed the Inland Empire. Those of us who were too dumb and clueless but in the right place at the right time know that the IE is our “cannon fodder.” An historical term that is lost on the current crop of cannon fodder. Let’s ignore all the speculation bits and just do a comparison. The IE is very new and thus carries very high Prop 13 taxes relative to the older coastal areas. The IE is a -very- energy intensive location. Heat in the winter, A/C in the summer and the winter, travel costs to jobs and services. Remember this is relative to coastal older California, a comparison not an absolutism.
It is correct that there aren’t enough jobs but worse, there aren’t enough production/manufacturing type jobs. The manager at Circuit City is a housing bubble employee. The ripple effect is going to close the Taco Bell in the IKEA strip mall not just impact the Countrywide office building in Ontario.
Robert,
Very well written. There is definitely a reason why it is the last built out place in California. There is nothing that redeems the place but the low cost of living.
The Billy Joel Song “No Man’s Land is the exact depiction of the IE.
I’ve seen those big machines come rolling through the quiet pines
Blue suits and bankers with their Volvos and their valentines
Give us this day our daily discount outlet merchandise
Raise up a multiplex and we will make a sacrifice
Now we’re gonna get the big business
Now we’re gonna get the real thing
Everybody’s all excited about it
Who remembers when it all began - out here in No Man’s Land
Before they passed the master plan - out here in No Man’s Land
Low supply and high demand - here in No Man’s Land
There ain’t much work out here in our consumer power base
No major industry, just miles and miles of parking space
This morning’s paper says our neighbor’s in a cocaine bust
Lots more to read about Lolita and suburban lust
Now we’re gonna get the whole story
Now we’re gonna be in prime time
Everybody’s all excited about it
I see these children with their boredom and their vacant stares
God help us all if we’re to blame for their unanswered prayers
They roll the sidewalks up at night this place goes underground
Thanks to the Condo Kings there’s cable now in Zombietown
Now we’re gonna get the closed circuit
Now we’re gonna get the Top 40
Now we’re gonna get the sports franchise
Now we’re gonna get the major attractions
The Inland Empire needs a motto. Suggestions:
The IE, only 2 hours from everything!
The IE, ground zero for participating in the housing market.
The IE, not much empire really but a whole lot of inland.
The IE, don’t blink, don’t even think about blinking.
The IE, make the leap but watch that first step.
Robert, That’s the best summary of the IE i’ve ever read and I lived there for more than ten years. I believe for all the reasons you mention it will be the first area to experience real estate market deflation. Also, for all the reasons you list, the IE is populated by hicks who elect subpar public officials who aren’t qualified to spend public funds. The combination of all these factors spells disaster for Temecula, Lake Elsinore, Murrieta, Corona, et al. In the summer my utility bills, mostly water and electric, exceeded $400 per month. Ouch. The commute to LA and OC today takes at least two hours. Ten years ago it was about one hour.
Have been tracking RE sales?listing prices for the six SCal counties for last 6 monthes. Bubble pop is hitting San Diego first(6.7% appreciation in 2005).
LA County shows next lowest appreciation at 16% in 2005 so it appears to be next county to be hit by bubble burst. Oc may become third in line but hard to tell-they appear to be head-to -head with Ventura county. It appears that Inland empire(riverside and San Bernardino counties will be hit last by the Re bubble burst. Apparantly there are still plenty of demand for homes there, especially in the low to mid range category. But the bubble will pop there eventually, and riverside is is rated among the 10 riskiest regions nationwide for RE decline).
Over the last several decades coastal dwellers have been moving out to buy homes in the inland empire because of affordable housing. back in the 70’s-80’s you could buy a home-condo for 30,000-60,000 and San Bernardino was still bucolic and largly rural. Now the inland empire has become a traffic choked, residential/commercial.industrial ugly sprawl. The only industry so to speak is warehousing and trucking. There are some attractive residential/commercial areas such as rancho cucamonga, chino, corona and some newly sprung communities along the 15 headed toward the cajon pass but all in all the inland empire has little attraction except for its affordable housing compared to the coast. Now that prices in the IE have shot up during the current bubble to ave median of 350,000(?)it has lost any appeal and thus the prices here will drop steeply over next several years. They have to :San bernardino is by any standard the least desirable county?city to have a home due to the following factors:high crime rate: smog,stifling hot summers,snarling traffic due to bad urban planning and inadequate freeway constuction, large numbers of low-income residents, limited high-end job base, I bet that 90 % of homeowners in IE commute to jobs in LA/OC.