Curious Capitalist

A Tale of Two California Cities

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For several months now, I’ve been writing about the 2% economy, the current sluggish state of growth in the U.S., one that I expect to hold for some time. But a weekend spent in southern California, in both Orange County and neighboring San Bernardino, has me thinking about how the American economy isn’t really a 2% economy, but bifurcated one in which some areas are booming, and others are stagnating.

Here in the O.C., things look pretty good. In Dana Point, where I am attending a conference held by TIME’s sister publication, Fortune, the unemployment rate is 5.7%, more than two percentage points below the national average. Hollywood, Silicon Valley, and finance money keep real estate prices relatively high. Warren Buffett has a house in the area, as does George Clooney. There was no shortage of people paying $37 bucks for what looked like about three bites of Hawaiian moonfish in the dining room of the St. Regis last night.

(MORE: How the ‘Maker’ Movement Plans to Transform the U.S. Economy)

San Bernardino, an hour or two away depending on traffic, may as well be a different country. Indeed, the Del Rosa neighborhood, one of the hardest hit in the housing crisis, looks like a developing one. Groups of young men and children hang out in front of a corner bodega. Among the small, mostly shabby bungalows that make up the housing stock, a few homeowners are making an effort, keeping the grass freshly cut or adorning their porches with an assortment of potted plants. It’s a losing battle, however, because on nearly every block is an abandoned home, left vacant after a foreclosure, or simply abandoned by an owner. Many are painted with gang graffiti, and used as drug dens. In one of these sad places, I saw a slew of dirty mattresses, empty liquor bottles and strewn trash.

The homes that actually had tenants living in them (I couldn’t find any owners) were guarded by pit bulls or large fences. One renter, Myrna Lopez, an assistant in the county office of public health, said she’d moved to the neighborhood because of the low rent — $1095.00 for a four-bedroom, two-bath house — which housed her large extended family more comfortably than the apartment they’d been living in a few towns away. But someone had been shot recently across the street, and she worried about letting her grandchildren play in the fenced-in yard unattended. “My husband is unemployed, so he looks after them all the time,” she said.

(MORE: Why the Euro Crisis Is Nowhere Near Being Over)

I came to San Bernardino because I’m intrigued by the proposal of county CEO Greg Devereaux that the county should use eminent domain to seize and restructure underwater mortgages. It’s a controversial proposal, and one born out of desperation. Four years on from the financial crisis, half of all mortgages in the county are still underwater and the foreclosure rate is 3.5 times the national average. Unemployment is over 12%. Devereaux has put together a group of local authorities to consider whether the county should work with an outside financial group to buy back the properties from private investors at current market value — which would be a fraction of what the investors paid, given that the median home price is about half what it was during the boom — and then restructure the loans at much lower rates. This would give homeowners some breathing room and, hopefully, stabilize the housing market and get the local economy back on track. “It’s the first idea I’ve seen that has enough size and scope to really shift the housing market,” says Devereaux. “It’s not about moral rightness. It’s about our economy. Things are very, very bad here.”

Needless to say, the banks and mortgage firms that would have to take the haircut are furious. And it’s not hard to see why: If you can’t count on a contract being respected, they might argue, a new and very large risk factor is introduced into the lending system. If the rule of law doesn’t hold, then what separates the U.S. from developing nations in which property rights are ever changing, and political risk is high?

Sadly, San Bernardino already seems like a poor country — and one without the clear growth potential of many global emerging markets. Before the crash, housing made up 25% of the economy. Now that it’s gone, there’s little to take its place. During the two-hour drive from the coast, I saw numerous roadside advertisements for personal credit counseling, mega-churches, and mobile home outlets. The haze of the housing boom made people think that a desert city with little economic diversity, a poor educational system, and a low tax base could become the next prosperous, O.C. bedroom community. Instead, it seems like a place where if you get off track, you might become dehydrated and die.

(MORE: The Economy’s New Rules: Go Glocal)

Whatever its future, San Bernardino will be going it alone. The federal government is getting out of the housing business. Poor California finances mean that the state is pushing more financial responsibility for things like education, infrastructure, and prisons onto local governments. “Local government is definitely going to have to do more with less,” says Devereaux. “But the truth is, we’re also going to be doing less with less.” Even if the city decides to pursue eminent domain restructuring — and is allowed do to so legally — it’s future growth is far from clear. While large swaths of coastal California may prosper, the Inland Empire will likely be economically traumatized for years to come. As I recently wrote in TIME magazine, all economics is becoming local. And for some communities, the 2% economy may actually be aspirational.

30 comments
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davidrsmithdvm
davidrsmithdvm

I still do not understand why underwater is an excuse.  My car is worth less than I owe depending on the size of down payment.  My blue jeans are worth less than I paid for them and my shoes are mine once I walk out the door and less than I paid.  Maybe being out of work is a reason to walk but not underwater

davidrsmithdvm
davidrsmithdvm

I  still do not get the excuse of "underwater".  My car is worth less than I owe shortly after I buy it depending on the down-payment size.  My blue jeans are definitely worth less than I paid after I buy them and wear them once.  My shoes even more so after I wear them out the door.  So why bitch about a house being less than you owe if you can afford the payments.  Out of work may be the only reason to walk.

tma_sierrahills
tma_sierrahills

"Many are painted with gang graffiti, and used as drug dens. In one of these sad places, I saw a slew of dirty mattresses, empty liquor bottles and strewn trash."

Of course the central explanation for all this could never have anything to do with race. As America and other Western nations become ever more filled up by the Third World, this will be the future of all post-Western nations. This didn't have to happen. In the U.S. it is the result of the anti-Western anti-environment in-migration policies of the Democratic Party and their enablers in doofus GOP.

dbartenstein
dbartenstein

 The Mexicans and Indians were in San Bernardino quite a long time before your white a$$ ever took it away from them........

tma_sierrahills
tma_sierrahills

I was not here at that time. And since white settlement we have had decades of illegal invasions from the Third World just in my lifetime, often playing on the kind of anti-white hatred and guilt-mongering you express. This was Mexican land for less than 30 years. Before that it was Spanish land for much longer. Before that it was Indian land for much much longer. Also, Indians, today's "Native Americans," were not the first people to come to North America. In any case, none of this changes what I said. Just look at Mexico today for your answer. Land of some extreme wealth, limited middle class, tons of poor people, many desperately trying to escape north, and a continual Beheading Festival. 

Sean A
Sean A

Sounds like such a grand idea - not.  Use eminent domain to seize a 300k mortgage at 3.5% or $1350/mo and convert it into a 200k mortgage at 10% or $1750/mo.  How does that save the city's economy again?

riorico
riorico

I grew up around San Boogaloo and yes, comparing it to Dana Point is ludicrous.  What's happened to the Inland Empire? Productive agricultural land had been paved- and built-over with cheap housing, giving vast slurbs with no bases for employment. Local govts lack resources for enticing light industry. Most jobs are located elsewhere, as are the sources of water-power-food consumed here. It's just not sustainable.

joey__19
joey__19

OC is doing good?  how about a 1.7M$ house only sold for 700K$?  is that good? small-time millionnaires there are becoming less and less and less

Mary Waterton
Mary Waterton

A dozen or more of these medium to large cities will go bankrupt before it's over. All this state did was postpone the day of reckoning with more borrowing and accounting stunts. The debt overhang is still there and still growing.

hdmoon
hdmoon

It's the lack of strong businesses....and poor decision-making by those in leadership.  When the Norton base closed, all that was left was a big sucking sound.   There's a lot of open land in San Berdoo, good for product logistics firms that only seemed to be recognized in the last 5-10 years.  The city was complacent and acted too slow, so the hub has grown up around Ontario, 20 miles down the freeway.

18235
18235

orange county = 34 percent latino, 2 percent black

san bernadino = 49 percent, 9 percent black

YA THINK DAT MIGHT HAVE SOMETHIN TO DO WITH WHY ONE IS DOING GOOD AND THE OTHER ISNT?

tma_sierrahills
tma_sierrahills

At last, someone who is not afraid of the loving Tolerance Police and simply states the obvious truth. 

Jennifer J. Gildea
Jennifer J. Gildea

The Del Rosa neighborhood in San Bernardino has been a slum for many many years. WWW.GetPositionBetweenMilliona...

tma_sierrahills
tma_sierrahills

"Give me a break! Would you compare Watts to Beverly Hills?"

What looks more like the Third World, Watts or Beverly Hills?

"The Del Rosa neighborhood in San Bernardino has been a slum for many many years."

Yes, I rest my case.

Jennifer J. Gildea
Jennifer J. Gildea

@18235:disqus A tale of two cities? Give me a break! Would you compare Watts to Beverly Hills? Philip explained I'm surprised that you can make $7385 in four weeks on the network. have you seen this(Click on menu Home)..KingofProfits2012.webs.com

Hank Rodgers
Hank Rodgers

It is not at all DIRECTLY about race 18235, it is about the relative POVERTY of the two Counties. Of course, the so-called (and former) "minority" races are much more inclined to BE poor, so there is correlation, BUT NOT CAUSATION, based on race. Poverty, and the family history of poverty is, however, a factor that BOTH CAUSES AND RESULTS FROM a lack of EDUCATION, and thus OPPORTUNITY. So, as a self-completing circle, it is not so simple is it?

The coastal environment has also always been more attractive to people too, meaning that eventually, in a competitive world, only the wealthier could afford it; as they established their businesses and increasingly expensive homes there, driving out the less wealthy, and making the O.C. even more wealthy. Then, as the children and grandchildren, particularly the less successful in "the family" came along, even in formerly middle class families that could originally afford to live here; and as jobs in the O.C. required more (costly) education, and the homes became unaffordable to the younger middle class, they pushed on into Riverside and S.B. County.

Over the years, and from there, THEIR children pushed even into Southern Arizona and the Las Vegas area, and thus the grandchildren of the former middle class have become something less. We know what has happened to the "economy" and its resulting "desert left overs", where they have "arrived". The wealthy foreigners that have found the coastal California counties so desireable, have now also added to the "competition", and the to declining sense of community -- if any of that is left at all.

Cng
Cng

 My brother is an elementary school teacher in the city of SB. A large problem is these minority parents need to push their kids to do better with education. Oh, and add in how many children are being raised by single parents, aunts, uncles, and grandparents. Stable homes would be nice.

BrianAdam
BrianAdam

Joseph explained I'm stunned that people able to earn $8586 in 4 weeks on the network. did you look at this(Click on menu Home)   

Laura L. Connolly
Laura L. Connolly

@bellaluna30:disqus into the lending system, so for them to complain that another entity is trying something "risky" is hypocritical, at best, wouldn't you agree? My mothers neighbour is working part time and averaging $9O00 a month. I'm a single mum and just got my first paycheck for $6546! I still can't believe it. I tried it out cause I got really desperate and now I couldn't be happier. Heres what I do,..KingofProfits2012.webs.com

Laura L. Connolly
Laura L. Connolly

Banks and mortgage firms are largely responsible for introducing "a new and very large risk factor"@bellaluna30:disqus 

..Zap21.com

seedygirl
seedygirl

The Del Rosa neighborhood in San Bernardino has been a slum for many many years. A tale of two cities? Give me a break! Would you compare Watts to Beverly Hills?

18235
18235

watts vs beverly hills=

beverly hills is mostly hypocritical, liberal, rich whites in the hypocritical, white, liberal media.

watts is mostly poor blacks who follow the hypocritical rich whites in the mostly white liberal media.

Lobo04
Lobo04

And you managed to contribute nothing to the conversation.  Neither of your comments helps the problem.  Just a lot of noise. 

18235
18235

YOUR GENERIC POST amounts to that.

ok for me to copy and past your generic post, re politics, movies, music, art, etc.?

hdmoon
hdmoon

 it spread and got worse.  i drove to a house i rented in the 90s, a few blocks away from Del Rosa.  in my tract, homes were well kept, with the abandoned foreclosure being the odd one out.  out of curiosity, i drove by last year and the opposite was true.  lots of homes in disrepair with cars and junk on the lawn, weeds overgrown.  it's sad.

bellaluna30
bellaluna30

In the city in which we used to reside (inland), there were so many foreclosures that the City Council actually moved to "legally compel" the banks amp; mortgage companies to maintain the properties on which they had foreclosed.

Sad, when it has to come to that, don't you think?

bellaluna30
bellaluna30

Banks and mortgage firms are largely responsible for introducing "a new and very large risk factor" into the lending system, so for them to complain that another entity is trying something "risky" is hypocritical, at best, wouldn't you agree?