Home owners have a vested interest in seeing their home value increase. This is probably no shocking revelation. But local governments may have an even bigger interest in rising values. Property taxes are on the uptrend with higher home values. Property taxes are a major source of revenue for local governments and go to various things including school districts, community colleges, counties, and cities. Certainly the big jump in real estate values is causing these local agencies to cheer on the real estate market. Even with the 1 percent property tax rate in California, local governments collected well over $50 billion. There is another $4 to $5 billion in additional property taxes levied to pay bonded indebtedness and many in Orange County and Los Angeles County get a taste of this on an annual basis. Many local governments I’m sure love the fact that many properties are being sold at a much higher reassessed values. Let us examine the trend with property taxes.
One piece of housing information that warrants a deeper analysis is the continually falling home ownership rate. Since the recession hit over 5,000,000 Americans have gone through the process of foreclosure. Yet for over a year now, the housing market has been recovering with lower interest rates, higher home prices, and a record low amount of inventory. Yet even on the national inventory front, it does look like some pressure is being released on this end. US housing starts are bouncing from the bottom and this will add much needed relief on the inventory side. However, this doesn’t answer why the home ownership rate has fallen so hard. Trying to explain the dichotomies in the housing market is like trying to wrap your head around dark matter. Sure, those that went through a foreclosure are likely now in rental housing. But as foreclosures become a smaller part of the market, why does the rate continue to fall like dominoes falling over one another with momentum? And the term “investor” has definitely shifted in the last few years. Let us take a look at the overall trends first.
Only in Southern California will you have someone moan about making six-figures while driving their European financed car and not being able to “live well” while the weather is near perfect all year round. There is one thing you can’t complain about and that is the weather. Ironically though, some of the cheaper SoCal counties like the Inland Empire have weather on par with Arizona or Nevada. So the groaning comes from people looking to buy cheap beach front property for example. Newsflash, beachfront property will be expensive in boom and bust. Yet let us focus on bigger markets since SoCal is vast. Last month sales reached a five year high for April but guess what? So did the use of jumbo loans. Jumbo loans accounted for 26 percent of originated loans, the highest since September of 2007. Another 33 percent of purchases were made by all cash buyers. FHA insured loans still accounted for 21 percent of mortgages and this will be an interesting figure to watch as FHA insured loans become incredibly expensive in June. Little by little certain areas of SoCal are being gentrified as those unable to buy are pushed further inland or are forced to move out of state (or rent which isn’t such a bad deal).
Going to any open house in Southern California during a sunny weekend will make you think that the entire housing market is on fire and that the homeownership rate must be going up. Obviously with all these buyers, the rate must be going up. Right? Well it isn’t because a large number of these buyers will be absentee buyers or will flip the house shortly. Another bigger reason comes from the lack of supply. The maddening crowds are simply hungry investors and regular buyers trying to out-bid each other for the limited supply of homes on the market. Low rates are adding fuel to this mania but the homeownership rate continues to decline. So what gives?
The data coming out on home prices is rather clear. Home prices are moving up steadily in the last year now increasing at a rate last seen in 2006. Of course, little of this is coming from wage growth but more from easy access to debt, investor demand, and historically low supply. One thing that people fail to remember is that during the last housing bubble, people were supplementing a lack of income growth with easy access to debt to add fuel to the housing market. This time, the easy money is being supplied to banks and hedge funds that are simply chasing higher yields. Anyone that has a hand in the housing business, especially in the grind it out rental business understands that it is no hands off endeavor. This is why it is surprising to see how much money is now being funneled into the market by brand new small time investors, especially in places like California. You know things are getting frothy when new money is willing to chase the rental business.
Foreclosures are still relatively high but what makes things appear to be better comes from a couple of fronts. First, foreclosures are being purchased at a faster rate by investors and some are doing this at the courthouse steps under a Nevada sun or rolling storms of Florida. So many do not make the MLS where the public can view them. The low supply has definitely pushed prices higher. What is interesting is the jump in pre-foreclosures. Part of this has to do with moratoriums that occurred over the last few years in a handful of states. It looks like banks are now deciding to move on more properties given that the market is now prime for this. Low supply and higher prices will make it a more lucrative venture to move on some of the pending foreclosures. This is a reason pre-foreclosure activity, the first step in the foreclosure process is up by 200,000+ from last year. It is useful to also look at home prices in relation to inflation. Let us first examine the foreclosure situation.
The good news for our inventory starved nation is that supply is indeed increasing. The trend is positive this year and it is starting to look like we reached a bottom when it comes to the lack of inventory. The only caveat in this is that it is unlikely to be in an area where you are looking to buy. Now we have readers from all across the country and the positive news is that the pressure valve might be opening up this year when it comes to the selection of homes. Yet we also have a large contingent of California buyers looking to buy in very select markets. There is little indication that inventory is coming back here and some of these markets are actually making new or close to new record highs when it comes to prices. Let us first look at the change in nationwide inventory and then target a few prime SoCal markets.