Sometimes playfully referred to as the “Endless Empire” due to encompassing two of the country’s largest counties by acreage, the core Inland Empire portion of the Riverside-San Bernardino-Ontario metropolitan statistical area surrounding its major cities is the primary economic engine for the two-county region.
Located about 60 miles from the twin ports of Los Angeles and Long Beach and featuring its own Ontario International Airport, this area has become one of the world’s most important centers for warehousing and logistics. In 2021, these twin ports accounted for 29% of the national market share of maritime trade via containers, and were connected to one in every nine jobs in the greater Los Angeles metropolitan area, including the Inland Empire.
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However, this vast industrial development has come with its own environmental consequences, with air pollution from diesel exhaust, ozone and other sources ranking the counties of Riverside and San Bernardino among the worst in the country by the American Lung Association.
Still, the metropolitan statistical area, or MSA, also includes a bounty of natural beauty in its mountain ranges and deserts to the north and east, both of which are home to a collection of resort communities with homes for first-time buyers as well as millionaires and billionaires.
Similar to the overall U.S. housing market in mid-2020, the Riverside-San Bernardino-Ontario housing market became quite frenzied through the first half of 2022, marked by a sharp decline in months of inventory, bidding wars and rising prices. By the start of 2023, although the Inland Empire housing market had softened from its most recent sales peak in March 2022, by February 2023 both sales and median prices had begun to rise again, signaling that incentives such as mortgage rate buydowns were helping to sell homes.
Using information from the U.S. News Housing Market Index, we’ve compiled the data you need for a better understanding of the Riverside-San Bernardino-Ontario MSA housing market in 2023.
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How the Riverside-San Bernardino-Ontario Housing Market Changed in 2022
During 2022, the level of monthly single-family detached home building permits authorized in the Riverside-San Bernardino-Ontario MSA peaked at 1,588 units in March then continued to decline to range from about 400 to 700 units between September and February 2023. For the three-month period ending in February 2023 versus the same period a year earlier, single-family permit requests fell nearly 36%.
For the multifamily sector, permit issuances also peaked in March at 435 units, and steadily fell to under 230 units by October. Since then, the number of multifamily building permits have rebounded, reaching 580 by February 2023. During the three-month period ending in February 2023, 20.5% more multifamily permits were requested versus the same months ending in February 2022. When comparing just the months of February for 2022 versus 2023, the number of multifamily permits issued rose by nearly 42%.
Riverside-San Bernardino-Ontario Housing Supply and Demand
In general, if a balanced housing market includes three to six months of inventory, this Southern California market continues to favor sellers. The supply of housing in the Riverside-San Bernardino-Ontario MSA, which had dipped as low as 1.24 months in March 2022, continued edging up through the rest of the year to 4.08 months by November. By February 2023, however, inventory had again slipped back to 3.19 months.
Still, for just the month of February 2023 year over year, the supply of homes for sale in the region rose by just over 1.59 months, or 99%. Notably, this level of supply of nearly 3.2 months was healthier than the months of supply for the overall U.S. in February at 2.62 months, which rose 1.10 months year over year, or about 72%.
According to Amado Hernandez, president of the Inland Valleys Association of Realtors and owner of Excellence Empire Real Estate, “Seventy-five percent of buyers are coming from Orange County, Los Angeles County and San Diego County.” However, he fears that some potential first-time buyers are missing out on homeownership options because they’re not aware of various down payment assistance programs.
“The hunger of buyers is there, but with their perception of affordability they shoot themselves in the foot,” Hernandez says. “When people are not informed of these programs, the worst thing they can do is be a perpetual tenant.”
These state and local programs, which include the California Dream For All Shared Appreciation Loan, offer assistance for down payment and closing costs in the form of grants and loans. However, the California Dream program was so popular that it ran out of funds within the first two weeks of its launch, and currently awaits future allocations from the state budget.
The demand for housing is understandable. Given the area’s rise as one of the country’s most important centers for warehousing and logistics, a region which once served as farmland and far-flung suburbs to employment centers closer to the coast has morphed into an economic engine with an annual GDP of over $213 billion. In Moreno Valley, the World Logistics Center will add another 40.6 million square feet of warehouse space by 2030. If the Riverside-San Bernardino-Ontario MSA were its own country, based on 2021 figures it would rank 52nd and nearly match the annual economic output of Greece. As Hernandez puts it, “We’re not a bedroom community anymore.”
In addition, the sheer size of the MSA also allows for resort-oriented areas scattered among mountain ranges which soar over 10,000 feet, as well as high desert areas including Joshua Tree National Park and low desert areas featuring greater Palm Springs and the annual Coachella Music Festival. In many cases, these resort areas are capturing buyers from out of the area.
“The (low) desert is doing surprisingly well,” says Rod Douglas, an agent with Compass in Palm Springs, whose former real estate law career comes in handy in a region where much of the land underneath homes is not sold to buyers, but rented through somewhat unique long-term leases. In addition, Douglas explains that by not banning short-term rentals, as most cities in the Coachella Valley did, Palm Springs became a mecca for property investors during the COVID-19 pandemic. Now, with a cap in place limiting such rentals to no more than 20% of a neighborhood’s housing stock, sales prices for previous single-family party houses are declining.
In the rental market, the Riverside-San Bernardino-Ontario MSA’s vacancy rate reported for December 2022 by the Census Bureau rose 0.7% year over year to a still-low 2.9%. If a vacancy level of 5% is generally considered to represent rental market equilibrium between supply and demand, the Inland Empire is both a seller’s and a landlord’s market. While certainly an improvement from just 1.8% in October 2021, the vacancy rate in the MSA has remained under 5% since May 2022 as the COVID-19 pandemic began to recede, and more residents cooped up with family and roommates opted for their own places to live.
In addition to the low inventory, sales activity in the months ahead may also be impacted by rebounding mortgage rates resulting from stubborn inflation. Although inflation is slowly trending down, it’s still too high for the Federal Reserve, which hiked its Federal Funds rate another quarter-point in March. According to the seasonally adjusted Purchase Index from the Mortgage Bankers Association for the week ending March 31, purchase applications fell after rising for four consecutive weeks and were also down 35% year-on-year. Until mortgage rates subside more substantially, many buyers and sellers will likely remain on the sidelines.
Consumer sentiment as measured by the University of Michigan’s Survey of Consumers rose nationally to 64.9 on a 100-point scale in January but was still down 2.3 points year over year. By March, the index had slipped further to 62.0, with the subindexes for Current Economic Conditions falling to 66.3 and Consumer Expectations declining to 59.2. While an improvement year over year for March, stubborn inflation will likely continue to sap consumer sentiment for the foreseeable future.
Foreclosure Trends
Given the combination of low unemployment and most existing homeowners benefiting from low mortgage rates offered in 2021 and part of 2022, both foreclosures and delinquencies tracked by Black Knight remain at very low levels in the state of California.
As of January, just 0.2% of homes in California were in foreclosure versus 0.45% for the nation. Although statewide delinquencies in January were flat at 2% year over year versus 3.38% for the U.S., most delinquencies do not make it to the foreclosure process as quickly as they did during the financial crisis.
Median Home Price in Inland Empire
For buyers, a growing timeline of homes for sale in the latter half of 2022 helped to moderate prices, with the median sales price falling 2.5% year over year in February to $535,000. While this median price is still 38% higher than the national median of $387,000 and has fallen 7% from its peak of $575,000 last May, its current level is the highest since last September.
In the core Inland Valley areas around the cities of Riverside, San Bernardino and Ontario, Hernandez says it’s still very much a seller’s market, especially if a listing has enough land to build an accessory dwelling unit, or ADU, or if the existing structure can carve out a Junior ADU. In 2021, the state of California amended its Health and Safety Code requiring cities and counties to develop plans to incentivize the creation of ADUs as affordable rentals for very low- to moderate-income households. These incentives often include grants and loans to boost ADU supply as soon as possible.
“Our challenge is we have a lack of inventory, which is why ADUs are so hot now. People are ready to have an ADU,” Hernandez says, adding that some local cities are also exploring more ways to expedite the permitting process.
In the Palm Springs area, however, Douglas says the combination of stricter controls on short-term rentals and a softer market have given some power back to buyers.
“Prices are now more negotiable but all over the map, and properties sell better if they’re renovated,” Douglas says. “People will pay for really high-end and beautifully done remodels that are move-in ready.”
For newly built homes, potential buyers might find more generous incentives than with traditional existing resale units, especially for standing inventory.
“What we’re seeing in terms of price discounts and incentives overall range from 8% to 10%,” says Tom Grable, Southern California division president for Tri Pointe Homes and vice chair of the California Building Industry Association. However, the company is still mindful of buyers who likely paid more last year. “We look at the spec levels and the prices paid by people who bought last year to make sure they remain in a positive value proposition to justify the reductions.”
Grable says these new homes can vary from row townhomes and small-lot detached homes in places like Fontana or Chino, to more traditional single-family homes further east in Banning or Beaumont or to the south in Murrieta and Winchester. He also agrees with Hernandez that today’s Inland Empire offers more local employment centers than commuting into the coastal counties.
Although home prices did continue to rise in 2022, they peaked several months earlier in the year than median rental rates did from Zillow’s Observed Rent Index, which continued to rise through September to $2,572 per month. Since then, rents have fallen 3%, and are down 1.7% from February 2022.
The Census Bureau’s American Community Survey reported an increase of 62,000 households between 2019 and 2021 to 1.44 million as the MSA continues to benefit from lower housing costs versus the counties of Los Angeles, Orange and San Diego. Between 2021 and 2022, while the combined counties of Los Angeles and Orange lost nearly 100,000 people, the Riverside-San Bernardino-Ontario MSA gained nearly 20,000.
Nationally, while costs for new single-family homes, as reported by the Census Bureau’s Construction Cost Index for February, have retreated from their November peak rating of 195.5, they’re still up 10.2% year over year with a rating of 189.6.
Similarly, while average mortgage rates tracked by FreddieMac’s Primary Mortgage Market Survey did retreat from their peak of 6.9% in October 2022 to 6.27% in January, as of March 30 the rate for a 30-year fixed rate loan stood at 6.32%.
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Unemployment Trends in Inland Empire
Despite low inventory of homes available to buy and to rent, the Riverside-San Bernardino-Ontario MSA economy continues to add jobs, with non-farm employment in February 2023 rising by over 43,000 year over year to 1.67 million jobs. While the local unemployment rate for January fell 1.3 percentage points year over year to 4.4%, it’s still 1 full percentage point higher than the U.S. average of 3.4%.
Of this 43,300 annual rise in the total number of jobs, the fastest-growing fields included other services (5.6%), education and health services (3.9%) and government (2.7%). While jobs in construction did rise by 0.6% year over year through February, they accounted for 1,300 jobs, or 3% of the total annual gain.
Builder Confidence Recently Improves
Builder confidence on a scale of 0-100 for the West Census Region from the NAHB/Wells Fargo Housing Market Index fell 55 points year over year to 36 in March. While an improvement from the recent low of 25 in December, the index still slipped from 37 in February as builders contended with higher mortgage rates, which frequently require sales incentives such as mortgage rate buydowns to make the sale.
For nonresidential construction activity, the Architecture Billings Index provides another economic indicator with a lead time of approximately 9 to 12 months, with 50 marking the split between increases or decreases in billings. In February, the index for the West Census region rose 2.5 points year over year to 50.4, while the national index fell 3.3 points to 48.0.
Inland Empire Real Estate Market Predictions
Given the combination of a growing economy largely focused on the critical warehousing and logistics industry, and more households escaping steeper home prices and rents closer to the coast, the housing market in the Riverside-San Bernardino-Ontario MSA should continue to prosper due to limited supply. However, if mortgage rates rise again and stay there for an extended period of time, median prices could again decline.
Although the area’s home builders are providing new home supply as quickly as possible, regulatory constraints, higher materials costs and chronic labor shortages make it difficult to build entry-level homes. However, as Tri Pointe’s Grable explains, “We’re not in the price business as much as we’re in the monthly payment business, and to the extent we can get someone in that comfort level, we will sell homes.”
The U.S. News Housing Market Index is forecasting nearly 3,700 single-home permits from March through July, in addition to 1,654 permits approved for multifamily homes for the Riverside-San Bernardino-Ontario MSA. Although permits for single-family units did fall more than predicted in the last half of 2022 and through the first two months of 2023, permits for multifamily units jumped far over forecast, suggesting that builders of apartment flats, townhomes and single-family homes for rent are racing to meet pent-up demand.
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Riverside-San Bernardino-Ontario Housing Market Forecast originally appeared on usnews.com
