Downtown's boosters hailed the cranes dotting the skies over Los Angeles as sure signs that the city's building boom and economic good fortune were continuing. At the same time, ever-rising housing prices convinced homeowners across the region that their bet on Southern California was a prudent -- maybe brilliant -- one.
But now, as the housing market undergoes a painful correction -- home sales in Southern California last month plummeted to a 20-year low, and foreclosures set a high last quarter -- it's time to look beyond the real estate hype and wishful thinking. On closer inspection, much of the "boom" has turned out to be a "bubble," built not on rapid growth in personal income and new jobs in many industries, as in past regional booms, but mostly on a housing market gone mad. From 2001 to 2005, home prices in Southern California grew at roughly eight times that of people's median income, among the highest ratios in the country. By contrast, in Seattle, housing prices rose four times the rate of personal income, while in Denver, the ratio was 2 to 1.
So how could people in Southern California afford to buy a new or existing house whose price kept rising while their income didn't go up much?
The answer is that the mortgage industry, with Calabasas-based Countrywide Financial Corp. taking the lead, covered the difference between income and the cost of a home with such innovations as loans that didn't require down payments or whose initial interest rates were extremely low. Meanwhile, rising housing prices allowed homeowners to cash in some of their equity to buy boats, cars or take vacations in Europe. This boosted retail sales and generated a feeling of prosperity, particularly among the home-owning middle class.
The resulting boom was hard to deny because you could actually see the tall buildings going up downtown and the seemingly endless tracts of new houses fanning out across San Bernardino and Riverside counties and up hillsides in San Diego County.
But with home sales now falling, foreclosures skyrocketing and the mortgage industry reeling because of too many bad loans, the foundation of the Southern California boom is slowly crumbling.
Housing prices also jumped during the region's three most recent booms -- in the 1960s, mid-1980s and late-1990s. But in those cases, the rising prices generally were not the primary driver of economic activity. Instead, the engines of expansion were multiple -- international trade, diversified manufacturing, entertainment and, in the 1960s and 1980s, aerospace.
