The rise in rents and home prices is adding additional pressure to the bottom line of most California families. Home prices have been rising steadily for a few years largely driven by low inventory, little construction thanks to NIMBYism, and foreign money flowing into certain markets. But even areas that don’t have foreign demand are seeing prices jump all the while household incomes are stagnant. Yet that growth has hit a wall in 2016, largely because of financial turmoil. We’ve seen a big jump in the financial markets from 2009. Those big investor bets on real estate are paying off as rents continue to move up. For a place like California where net homeownership has fallen in the last decade, a growing list of new renter households is a good thing so long as you own a rental. The problem of course is that household incomes are not moving up and more money is being siphoned off into an unproductive asset class, a house. Let us look at the changing dynamics in California households.
The Taco Tuesday house humping brigade is having a tougher time denying that we are in another bubble. Sure, they keep pointing to prices going up and rents surging but what about stagnant household incomes or the stock market getting kicked between the legs? According to these delusional Kool-Aid drinkers, everyone is saving money and is perched on the fence ready to bounce on that piece of crap real estate that was built during the Great Depression. “But we don’t have no down payment loans!” Of course much of the move in prices over the last few years came from investors, foreign and domestic, that drove prices into the stratosphere. In the Bay Area, with the typical home selling for $1.2 million, even high income tech households are unable to buy. And you really have a double bubble. Easy venture capital money is trying to find those next mystical unicorns (i.e, Twitter, Facebook, SnapChat, etc) but this is another symptom of hot money trying to find a home. All of this growth is predicated on prices only going up. With households broke, a new product called a Poppyloan is here to save the day bringing back the zero down option. What could possibly go wrong?
Millennials as a group defined by an age range, are one of the largest cohorts of people right alongside baby boomers. Millennials have already reached their prime house humping age range but somehow, the homeownership rate in this category is not moving. The thought was that Millennials would soak up all the excess demand and continue to push prices upwards. In reality, what has kept prices up is artificially low interest rates, investors buying, and a low supply of property out in the market. Many Millennials are forced to rent or to live at home with their parents well into adulthood. Controlling biology has worked out nicely that new households tend to be smaller so many adults can just move back into their childhood room and have tasty tacos with their parents. The end result is that the housing market is moving for many different reasons beyond household formation. In fact, major household formation has come in the form of rentals since the Great Recession ended. Let us look at the latest data impacting Millennials.
I remember reading a book on the Dutch tulip bubble and could only shake my head thinking that people were trading property, jewels, and other valuables for what amounted to a basic plant that you can get at Home Depot at the checkout line. I’m sure when the mania was over many people must have thought “what in the world was I thinking?” You see that facial reaction in Las Vegas when someone hunkers out of a high roller room with empty pockets. Yet today in San Francisco, you have absolute craziness going on. The median price for a home is over $1 million dollars and most are pieces of crap. But someone is paying for this, right? Of course. Someone paid a lot for those tulips as well just like someone bought at the top AOL stock or any other failed investment. I guess my point is that human psychology still hasn’t changed much over this short historical period. Need proof in terms of housing? Housing values were up in the stratosphere just in 2007 and the mind had every useful reason to justify prices. Today we highlight a home in San Francisco that sold for more than $186,000 and was charred like a forgotten hot dog left on the grill by a Taco Tuesday baby boomer.
High housing costs have put extreme financial strain on working families in Los Angeles County. There has been a rental revolution over the last few years causing rents to increase. Despite the idea that this is being driven by income, this is merely being pushed by limited housing options. Income has been stagnant for many years. Since the crash, housing values have been pushed up by investors, flippers, and foreign buyers. Starting in 2015, the economy slowed down and housing hit a wall. 2016 is off to a poor start. What few realize is that many in L.A. County are living in densely packed areas through options like: living with parents, roommates, converted rooms, and pseudo-housing like garages. We can label converted rooms as “informal housing” and in Los Angeles we have over 200,000 people living in these units. In fact, parts of Los Angeles have population densities that beat out Queens, The Bronx, and Brooklyn. And you wonder why street parking sucks.