August 22, 2009

Demographics of the Inland Empire Mortgage Meltdown

The New York Times article "A Cul-de-Sac of Lost Dreams, and New Ones" profiles a nice-looking street in Moreno Valley in Riverside County, CA, where four of the eight homes have been foreclosed, and two more are teetering. It provides a human interest illustration of what I've been saying all along based on statistics.

Riverside Co. is ground zero for the mortgage meltdown. Moreno Valley, with 180,000 people, is 60 miles east of downtown LA, 80 miles in from the ocean. It was filled in by houses from west to east in the 1980s and 1990s. When I played golf there around 1990, the west half was completely carpeted by subdivisions, with homes under construction making up the eastern edge of the carpet, and the rest of the valley, farther from the jobs, all sagebrush. The demographics in 2007:
The racial makeup of the city was 23% Non-Hispanic White, 20% African American, 0.94% Native American, 8% Asian/Pacific Islander, 3% from other races, and 5.83% from two or more races. 46% of the population were Hispanic or Latino of any race.

The street attracted strivers from the working class and the lower middle class. Since people moved in and moved out, it's a little hard to calculate the demographics of the street from the article, but it looks like at the peak of the bubble it was at least half Mexican, one quarter white-Mexican couples, and perhaps one-eighth black. (The retired white couple featured in the article, the Hansons, who own their house outright and serve to keep the neighborhood organized, live around the corner from this culdesac.) This seems typical of who defaulted -- people from the second quartile up from the bottom who bought a nicer home than they could maybe afford, often to get into a decent school district and keep their kids out of the 'hood.

The houses on this street were built around 1997 so a lot of the owners got in before prices went crazy around 2004. But the ones who got in at non-crazy prices often couldn't resist home equity loans to live the good life or to speculate further on the Bubble.

Equity soon became irresistible.

Ms. Sanchez and Mr. Winkler, the couple with two daughters, wanted a new car. So they pulled $15,000 out of the house. Mr. Godfrey and Ms. Saldamando, the schoolteachers, dipped into their equity to landscape their back yard. Mr. Blanco, the electrician, used it to invest in a lot in the desert, and Mr. Soto, the landscaper, picked up a rental home in the Central Valley, an agricultural area northwest of here.

The block’s first residents, Ms Hernandez and her husband, bought a shiny commercial truck, with dreams of expanding his trucking business. He pulled money out of the house nearly annually. And the couple from South Los Angeles [I'm guessing they were black] used their house — bought for $152,500 in 1997 — as a veritable cash machine, refinancing three times before selling it in 2006 for $440,000.

But one by one, the strings began to come apart.

The new buyer of the Los Angeles couple’s home was quickly in over his head; he lost the house in less than a year, with $375,273 still owed.

Title records show that Ms. Hernandez and her husband bought their home in 1997 for $123,000, using nearly 100 percent borrowed money. They refinanced first in 2003, at 11.1 percent interest on $129,000. The equity loans kept coming: the balance rose to $230,000 in 2004; $323,00 in 2005; $374,000 in 2006; then, finally, $415,000, at 8.12 percent, in 2007.

“For a while things were going really, really good,” Ms. Hernandez said. “Then the truck broke down, and things went down from there. One day I came home and there was a note on the door that said call this number.”

It was only then, Ms. Hernandez said, that her husband told her about the equity loans and that “we were in foreclosure and needed to get out.” Last fall, the bank offered them $1,000 to leave the house quietly.

In general, the people who defaulted, setting off the crash, are the kind of people for whom our elites in recent decades had no plans for how they could earn more money (such as through immigration restriction or tariffs), but lots of plans for how they could borrow more money.

How's that working out lately?

My published articles are archived at iSteve.com -- Steve Sailer

27 comments:

Luke Lea said...

"the kind of people for whom our elites in recent decades had no plans for how they could earn more money (such as through immigration restriction or tarrifs), but lots of plans for how they could borrow more money."

Well said.

JRW said...

Lately I have come to believe that American government is completely owned by banks.

Subprime, zero-down, Fannie Mae-backed lending: good for banks.

Fed inflation target 1-2% inflation: good for banks as it gooses loan demand for asset speculation without too much value destruction of bank bond and mortgage holdings.

Big government borrowing and debt: good for banks.

Build factories in China: good for the banks that finance it.

Foreign aid: good for banks that use Uncle Sam to sweeten a proposed bank deal.

Americans deeply in debt: good for banks.

$700 billion bank bailout: etc., etc.

Trouble is, there's only a certain amount of debt that's good for a country. After you cross a line, the debt starts to strangle the economy. We crossed the line a long time ago.

Someday we may see peasants with pitchforks: bad for banks.

Anonymous said...

We had bubbles, real-estate and otherwise before we had Mexican immigration. This might have compounded the problem I admit. But really, if the banking system is set up so that people are buying junk CDO's and don't know what's in them, it doesn't matter what the ethnic background of the original buyer is, that's a sytem built to fail.

Don't ignore what's in front of your nose because you are attached to your pet theories.

Anonymous said...

The oddest thing about that article is how the 'old neighbors' look down on the 'new neighbors' for not having a nuclear family. The new neighbors seem a lot more responsible than the ones who were already in the neighborhood, and appear to be laying the groundwork for nuclear families down the road, but with responsible financial habits.

Steve Sailer said...

Yes, I'm sure the NYT editors were pleased that the worrisome newcomers from the trailer park who had bought in cheap after the crash were a Clampett-like clan of white kinfolk of three generations: the Moreno Valleybillies.

John Seiler said...

A lot of the blacks moving to Moreno Valley, maybe most of them, were squeezed out of L.A. by demographic pressures. Many others left for other parts of the country.

Over the past 22 years, I have driven through Moreno Valley about 10 times a year, and the growth was astonishing.

Another big area of growth is east of Palm Springs, where a lot of retirement communities have sprung up, one built by Del Webb. Del was one of the first to figure out how to get rich off the biggest socialist program in history, transferring trillions from struggling young couples to well-off retirees to spend on houses next to golf courses; it's called Socialist Security.

Anonymous said...

Steve,
Do you really honestly think that the elites actually give a damn about the Moreno Valley people, or even care less if they live, starve or die?

Steve Sailer said...

The bipartisan elites put a lot of effort into encouraging easier credits standards for the 77% of Moreno Valley residents who are non-white, which effectively lowered the standards for all 100%.

Camp of the Saints said...

How's that working out lately?

Oh, how snarky.

Yes, and how is the Steve Sailer "can't we all just get along" Citizenism Theory working out lately? Just where on planet earth in the history of civilization has multiracialism not devolved into racial struggle?

You ain't seen nothing yet in El Norte, Steve. The California demographics are utterly broken. Shocking economic and civic decline is now baked into the cake, and will not be manifested simply in a "recession" or a "depression", but as in a new, permanent, Latin American normal.

And here is how the European experiment in Citizenism is working out, Steve:

Eurabia Has A Capital: Rotterdam

In the end, Steve, you are another incoherent white liberal. The root causes of this disaster are simply off limits for discussion on this blog. Because the truth hurts a little too much.

l said...

Steve-
Question for you: Are our elites really as stupid as they appear, or were the bubble and the crash part of some kind of plan?

Anonymous said...

This should scare the Bejesus out of that legion of baby-boomers whose house is about the only equity they have. They hope some day to sell it and go to some retirement community. Well, this bubble has been a kind of 'dry run' for them. It clearly shows that the number of 'newcomers' that can actually afford homes is far smaller than previously thought. A large part of today's youngsters are born from illegal immigrants and ghetto mothers. There will NEVER be another credit bubble that will enable them to buy a doghouse, let alone our houses.

ironrailsironweights said...

One thing which becomes apparent upon reading the article is that excessive home-equity borrowing is only part of the reason why people on the block have been struggling. Job losses are a major factor too.

Peter

Anonymous said...

John Seiler: the biggest socialist program in history, transferring trillions from struggling young couples to well-off retirees

Making it all the more difficult for the struggling young couples to start families, placing further stress on an already collapsing fertility rate, meaning even fewer young workers in the next generation, requiring even higher tax rates to fund the transfer-payments to well-off retirees, making it all the more difficult...

Welcome to Nihilism 101.

The goal of this course is to examine the pseudo-intellectual infrastructure which will provide us with the rhetoric for propagandizing on behalf of the policies which will lead to the extinction of the species.

Anonymous said...

"But really, if the banking system is set up so that people are buying junk CDO's and don't know what's in them, it doesn't matter what the ethnic background of the original buyer is, that's a sytem built to fail."

Uhhhh...if the ethnic background of the original buyers happened to have been, say, Japanese, who, coincidentally, of course, happen to be engineers making 100K / year, then the CDOs wouldn't have been junk.

Darn those pet theories of Steve's and all that darned explanatory power. Darn all those facts in front of our noses that just happen to support Steve's pet theories. They sure do get in the way of seeing what the anti-racists are talking about.

David Davenport said...

Do you really honestly think that the elites actually give a damn about the Moreno Valley people, or even care less if they live, starve or die?

The e-leets do care about:

(1) Reselling mortgage loans;

(2) Cheap labor for construction work and for service industries;

(3) Further diluting the voting power of WASP America.

Still Anonymous said...

Excellent post. There are often posts on this site, or more often comments, that make we want to throw my computer out of my apartment window, but this post reminds me why I keep coming here.

idealart said...

"the kind of people for whom our elites in recent decades had no plans for how they could earn more money (such as through immigration restriction or tarrifs), but lots of plans for how they could borrow more money."

I remember asking some of the Western factory managers I used to golf with in Shangha: how can American companies/workers compete with people (millions of them) who are very, very happy to do low-tech work for $.50 per hour (no pension, no health insurance, no paid vacations, no social security)? They just looked at me and said, That's a good question!

The French have a €11/hour minimum wage and all sorts of state-run entitlements. But a Big Mac costs €11 and they have no money to buy much else.

I'm afraid we're all caught between a rock and a hard place, fellas. And the US ain't France. The US has a lot more high-maintenance people. The indigenous Europeans are a low-maintenance people.

Anonymous said...

JRW,
GS is all you need to know

eh said...

What Barry Ritholtz has to say about it. Not much. Seems to eat up the "human elements", i.e. fluff, the NYT can be counted on to supply in abundance.

eh said...

But a Big Mac costs €11 and they have no money to buy much else.

Ridiculous hyperbole. A Big Mac costs well under 5 euros.

McDonalds is very popular in France. You can even order a Big Mac on a whole wheat bun ('au pain complet').

M Stein said...

This 1996 book review of 'Backfire' by Economics & Finance Professor Ed Miller touches on lending practices back then. Miller was right on the money, his other articles are also excellent:

"Another chapter deals with the controversy over racial differences in home lending where well publicized media studies showed differences in lending rates based on race, but studies controlling for the applicant's characteristics showed much smaller differences, or no differences. However, the government was able to use threats of enforcement actions and its power over mergers to increase lending in minority areas.

A study (p. 329) is described that controlled for borrower characteristics such as credit history, loan: equity ratio, income, and many others. Apparently Hispanic, Asian, and Native American borrowers had default rates similar to those of white borrowers, while default rates and losses were significantly higher for black borrowers. This suggests fundamental differences in personality between blacks and non-blacks, such as I have argued elsewhere could have been produced by evolution (Miller 1994a, 1995a). It is easy to imagine that the type of personality that planned ahead and deferred consumption would have had an advantage in surviving the cold winters where the ancestors of white, Asians, and American Natives evolved. Banfield (1974) has argued that many of the problems of the American Inner city are due to a tendency (which he asserted was non-genetic) to prefer immediate gratification over future gratification, a trait that would probably make for poor credit worthiness.

As in other chapters there are examples of unintended consequences of government programs. Government pressures apparently led to increased mortgage lending in minority communities through more aggressive marketing (deduced since lending to minorities rose without rejection rates changing). ...


As in other chapters there are examples of unintended consequences of government programs. Government pressures apparently led to increased mortgage lending in minority communities through more aggressive marketing (deduced since lending to minorities rose without rejection rates changing)...

Another possible cost noted is that tampering with underwriting standards (such as lower down payments) could increase defaults, which hurts both the borrowers and lenders. High default rates have been noticed among inner-city (which in US usage often refers to minority neighborhoods) beneficiaries of such programs. A response has been to use credit histories (from things like credit cards) in evaluating mortgage applications, something that traditionally had not been widely used. Zelnick reports that in private conversation officials had expressed concern that such credit scoring techniques might become a hindrance to acceptance of minority mortgage applications. The author argues that if this happened, the efforts to use civil rights as a whip to beat lending institution into changing practices will have misfired.

There is another way not mentioned in which efforts to increase mortgage lending to minorities might benefit minorities less than anticipated. Increased credit availability can be expected to raise real estate prices as more buyers come into the market. Many of the initial beneficiaries of this price rise will be owners of rental properties and non-minorities owners. Once prices have reached their new higher level, new buyers may not benefit (and may suffer if lax underwriting standards lead to them not being able to continue payments, and defaulting). Also many minorities will continue to remain renters in the traditional neighborhoods, and the rents will come to reflect the higher real estate prices."

Journal of Social, Political, and Economic Studies, Vol. 21 (Winter 1996) No 4.

http://www.lrainc.com/swtaboo/stalkers/em_backf.html

David Davenport said...

But really, if the banking system is set up so that people are buying junk CDO's and don't know what's in them, it doesn't matter what the ethnic background of the original buyer is, that's a sytem built to fail.

But really, if the nation's system were set up so fewer ignorant lumpen proles were available to be exploited, it wouldn't matter what the ethnic background of the original house buyer is, the system not be built to fail.

Don't ignore what's in front of your nose because you are attached to your pet theories.

One thing which becomes apparent upon reading the article is that excessive home-equity borrowing is only part of the reason why people on the block have been struggling. Job losses are a major factor too.

Job losses a major factor? Do tell, of course!

A lot of the job losers are newly arrived illegales whose jobs were created as part of the real estate boom. Many of these "Hispanics" only came here because they were sucked in by the real estate and construction boom.

I bet some of the those entry-level subdivision houses in the Mojave Desert were sold to bipedal tools who were employed constructing the subdivisions, and who lost their jobs when the boom ended.

Their jobs were temporary and transient. Unfortunately, their residence in El Norte may not be temporary.

Their job skills are the skills of construction laborers, hotel and restaurant workers, and household servants. ... Low skill jobs that 21st century America doesn't need more of.

OK, the e-leets will probably be hiring more servants. Those little short brown ones are more docile than big angry Zulus.

RKU said...

Yes, an extremely good anecdotal account of the CA Mortgage Meltdown, providing a very useful "human face" to the crisis. But I really don't see that it much supports Steve's theory of the origins.

Look, I'm from CA originally, and unlike probably 90% of the commenters here, I actually know the demographics of the state pretty well. Probably most of the ISteve visitors read that Moreno Valley was ground-zero of the Meltdown, notice Steve's casual mention that it's 46% Latino, and take that as very strong evidence that Latino defaults were driving the crisis. If I were an ignorant East Coasters who didn't know anything about CA that's exactly what I'd think.

Here's the problem with that notion. The entire *state* of CA is almost 40% Latino, so Moreno Valley is NOT particularly Latino, probably just slightly above the state average, and the same is true for the entire surrounding Inland Empire region. Los Angeles itself is probably a little more heavily Latino than that, and hasn't been hit too hard. Silicon Valley and Orange County are also each roughly 40% Latino and don't have especially severe mortgage problems. Probably two of the most heavily Latino portions of the state are Santa Ana area in OC and and the area surrounding East LA, and no ones pointed to those places as having very high foreclosure rates. As near as I can tell, there's absolutely no correlation between Latino concentration and mortgage defaults.

This impression is certainly reinforced by the anecdotal details of the NYT story. The homeowners on the block seem to have been reasonably responsible individuals, and nearly all the foreclosures described were caused by lost jobs during the economic downturn, rather than because they took out mortgage loans they couldn't possibly hope to repay. High foreclosure rates due to recessionary job-losses are pretty common throughout American history, regardless of ethnicity. It's obviously true that lower-middle class families stretching themselves financially to buy a suburban home during the Bubble are the people most vulnerable when the economy collapses and they lose their jobs, but that's no great insight.

I'll also bet that East Coasters missed the real surprise that jumped out at me from Steve's demographic figures---at 20%, Moreno Valley is (probably) the most heavily black city in California after Oakland, being almost 200% more black than the CA state average of something like 7%. And in the NYT story, it was interesting that there was only one family on the block that never got along with the others, playing loud music late at night, drawing several police visits, and eventually turning their home "into a veritable cash machine" before being forced to sell it. The NYT reporter very delicately describes the family as being from "South Los Angeles" and Steve is almost certainly correct in assuming that they were black.

I always vaguely wondered where all the blacks from Watts and the rest of South-Central ended up going. I guess I now know...

Steve Sailer said...

If you look at RealtyTrac's Q1-2009 defaults/ Housing Unit table, you'll quickly notice three factors:

1. Since most of the defaults are on mortgages taken out during 2005-2006, zip codes with lots of new construction have the highest default rates. Thus, Riverside County has much higher default rates than, say, Orange County because Riverside County has open land, while Orange County is largely built over.

2. When making apples to apples comparisons in terms of how much new construction there was, however, default rates correlate very well with minority population. For example, in Orange County with 79 zip codes with at least 1000 housing units, zip codes from Santa Ana, which is overwhelmingly Hispanic, comprise four of six worst: 92707, 92701, 92703, and 92704.

(One other zip code that is sometimes said to be in Santa Ana, 92705, is down in the middle of the Orange Co. rankings, but 92705 is often referred to not as Santa Ana but as Tustin Highlands. It's about half NH White.)

At the MSA level, the correlation between 2006 share of subprime borrowing by minorities and q1-2009 default rate is 0.89.

http://vdare.com/sailer/090517_foreclosures.htm

Minorities are by no means all Hispanic in California. From Laderman's and Reid's study for the San Francisco Federal Reserve Bank, we see that blacks have even worse default rates adjusted for FICO and income (3.3X the white rate) than Hispanics (2.5X). And Asians aren't good either (1.6X). And, there are substantial numbers of "Others" in California (Pacific Islanders, American Indians, and who knows what else).

I've filed a Freedom of Information Act request to get the unadjusted raw numbers from the Fed. Until I get it, my very rough guessestimate is that minorities accounted for three quarters of the dollars lost to defaults in California, with Hispanics accounting for about three-fifths of the minority dollars defaulted.

idealart said...

I admit I exaggerated the amount to prove a point. I went to the chart you linked to and although there was nothing for France it did give the Euro rate for a Big Mac as +29% more than in the States.

That's still a sizable mark-up, due to the higher minimum wage.

My point was that I don't think raising tariffs, which in a sense is what the French have done by shifting wealth from the individual to the state, has proven effective in helping people "earn more money". The state is rich but the average Frenchman has little disposable income.

Nobody seems to want to come to grips with this fact: We may become permanently poorer even if we were somehow to eliminate immigration or raise tariffs.

idealart said...

The only way, as I see it, to ever stop the loss of income in the West is for the West to pressure places like China to implement the same entitlements we have to pay for, social security, pensions, state-subsidized health care, and so on. This will cause the price of labor to rise and bring equality to the cost of production.

Either that, or jettison the same over here, taking wealth from the state and giving it, along with risk, to the individual.

mickeyc said...

RKU:

Literally every point you make is wrong. You have destroyed my pet theory that people that can write well have better thinking abilities.

1)There is Federal data showing that 58% of subprime loans were given to Hispanics in SoCal.
Source: http://slycapital.com/2009/04/21/ethnic-makeup-of-subprime/

2) Los Angeles has declined 41.8% from the peak according to the Case Shiller index. The other two areas you mentioned have also experienced catastrophic declines.

3) "East LA, and no ones pointed to those places as having very high foreclosure rates" Umm, you claim to be from the region. If this is true making a statement like this is nutty. If you need evidence please take a drive through this area you know so well or alternatively take a look at the MLS listings.

4)The defining feature of the article was that EVERY RESIDENT took out very large sums in HELOC's every year!

5) I would like to bet every East Coaster with an IQ over 100 worked out that the reporter had found a way to describe a black family by describing them as from "South Los Angeles". The only problem with this description is that South LA is heavily Hispanic. I actually laughed when I read this none too subtle piece of racism.

6) Black people in SoCal took out only 10% of all subprime mortgages. Even if every one of them decided not to pay this doesn't remotely explain a failure rate of over 50% currently.

Personally I know many Hispanics who are defaulting on their mortgages (probably because I actually live here). I know one guy who has a part time warehouse job at minimum wage who "owned" five houses. Amazingly enough he has defaulted. A friend of mine in Santa Barbara had a gardener who had bought an entire apartment block in the city. He too - who knows why?! - lost the place.

Facts are b..ch, huh?