The end of the year is here and Southern California home sales are slogging along into the final months. People have lost perspective on value but it would seem that two things have happened. People are being rational and viewing current prices as frothy so are deciding to hold back. You also have investors pulling back dramatically this year putting a dent into sales. So the argument now goes, if some willing sucker paid this amount then it surely is “worth” it. Yet most of the entry level priced homes leave much to be desired and of course, aspiring property ladder climbers only hope to stay in the first rung of the ladder for a few short years until the equity gravy train comes along. In other words, timing the market. Good old fashion speculation. Some view real estate as this super secure investment yet somehow 1,000,000 Californians lost their homes to foreclosure since the bust occurred. $10,000 in the stock market is risky but half a million for a tiny box? Safest bet on the planet thanks to all the juicy leverage! So what does the starter home look like if you are aiming at buying in Culver City?
People look at population growth in California and see nothing that stands out. Digging into the numbers you find some interesting figures. First, the main reason California is actually growing is because of international migration. California for well over a decade is losing domestic residents. That is, “domestic” Californians on a net basis are heading out of the state. On a more micro level, you are seeing the middle class either being phased out of the state or being pushed into lower priced inland regions. It is an interesting trend that is also happening in the tech hungry Bay Area. Housing continues to be an important topic because the vast majority of income is spent on housing. California has one of the highest percentage of families spending half or more of their monthly income on either rent or housing payments. In places like Los Angeles the main international migration is coming from Asia. You also see this driving up real estate values in certain areas and this contributes to domestic out migration. The migration numbers are interesting and shed light on this global trend.
The Housing Affordability Index (HAI) is once again flashing red for California. Los Angeles and Orange counties are two of the most expensive markets to rent relative to what people earn in the area. The The HAI is showing that once again, California is incredibly overpriced. Only 30 percent of families can afford the typical home in the state. I thought it would be useful to look at data showing the typical non-investor buyer in California. These are people after all, that are putting their money in the game. It should be obvious that the middle class is being priced out of the state. As we enter the last month of the year, the housing market will likely end on a rather dull note. Those that qualify to buy understand the large commitment it will take to purchase a home in the current market. Locking in at this point is no easy decision. But for many, there is no decision to make because the majority of large markets in the state are simply unaffordable. This continues to explain the large number of people living with parents deep into their 30s and even 40s but also the decline in sales volume.
There is a heavy premium that is placed on purchasing a single family detached property. In the past, condos were seen as a fine entry point into the housing market before trading up to a single family detached home. But with current home and condo prices, people are looking at making their first purchase stick. Since there appears to be a slowdown in the housing market, we are seeing some interesting marketing on how properties are pitched. One of them is the condo alternative pitch on smaller properties. These homes are targeted to those desperately trying to get their foot into the housing market even if the home is smaller than a condo. I’ve seen a good amount of these properties hitting the market in Pasadena. I would imagine that many buying these places are planning on leveraging up in a few years and going with a bigger property, especially if they plan on having a family given buying a home tends to set the stage for kids. Let us take a look at a current property in Pasadena that fits the bill.
There tends to be this notion that politics and housing are fully separate realms. Never do the two meet. Yet there is a large connection between politics and housing. Even during the bailouts the propaganda was that too big to fail banks needed to remain to provide loans for middle class families. The underlying assumption was about keeping affordability alive. Instead housing once again has become unaffordable for many and prices are out of reach for many middle class Americans living in large cities. As it turns out, it appears that cities that tend to vote liberal actually have some of the worst housing affordability. San Francisco is the worst offender. Ironically the politics are largely one of strong protections but what unfolds is massive constraints on land usage and NIMBY policies that constrain inventory. Even things like Proposition 13 simply inflate prices for the locked in low tax rate while the big pitch here was to keep grandma from being booted out in the street and eating Kibbles ‘n Bits. They forgot to mention grandma was actually holding onto a lottery ticket. Now grandma lives in a million dollar shack in San Francisco but still shops at the dollar store. Places like the South, including Texas have conservative policies and some of the most affordable real estate in the United States. It would appear that liberal cities are no place for the middle class but of course there is more to it.