It is safe to say that the momentum of 2013 has fizzled out in the housing market. Sales are down and prices are reaching a plateau. Part of this has come from the slowdown of investors purchasing homes in the state. An interesting end of the year study by the California Association of Realtors (CAR) found that 82 percent of investors that bought in 2013 had the intention of turning the home into a rental. The other 18 percent were giving the old flipper lottery a try. This helps to explain why inventory continues to remain lowbecause in more typical markets, a person selling the home would usually also buy another home in the ragtime favorite trend of property laddering your way into a bigger home. In other words, two transactions with one move. Today, you have many investors buying foreclosures from banks with a one and done deal (buy the home from bank and then put it on the market for rent). Yet from contacts in the housing industry, the lack of first time home buyers is dramatic. In 2013 the argument was that pent up demand for young buyers was going to give housing another dramatic run higher. In reality, 2013 gave us a massive run from investors and with them slowly pulling back, the market is already entering into a tipping point. Flippers buy for appreciation so what happens when prices stagnant or turn lower which is typical in these boom and bust cycles? In reality, first time buyers are absent because they can’t afford to buy in California.
As it turns out, investor buying does have a massive impact on local real estate. Big money is slowly starting to pull away from the real estate market. We are seeing this in dramatic fashion in Arizona and Nevada. It is also happening here in the sunny Golden State. What is interesting in the last housing correction is that prices and sales fell on the outskirts first and slowly made their way inward. The marginal buyer is pushed out first before making its way up the economic food chain. We are seeing similar action happening in places like the Inland Empire and Central Valley where inventory is certainly up and prices are hitting plateaus. The momentum from 2013 is now running on fumes. We also have certain cities being dominated by investors and in many cases money is coming directly from China. Hot money is finding a home in the oddest of places. Yet one thing is certain and that is SoCal real estate is now entering into an inflection point. As this turn unfolds we are going to find out what areas are truly prime and what other areas are all hat with no cattle.
When you are deep in the euphoria of a mania it is funny what you will come up with to justify shoddy construction, aged properties, and ultimately a profound delusion of value. People are willing to pay outrageous prices because other lemmings are willing to walk alongside them holding their sweaty palms and chanting “real estate only goes up, real estate only goes up, real estate only goes up.” I’ve recently looked at older areas in more desirable cities and you will find older homeowners inching along in a million dollar home yet unable to unlock their equity. Instead of living like a millionaire homeowner, they are counting their pennies for their next gourmet meal of Fancy Feast with a side of Purina Dog Chow. Many do not want to give up their lottery ticket even though they have incredibly out stretched budgets. Some complain about taxes, insurance, and other costs but live in homes with incredibly high assessed values. There is also an interesting movement for minimalist living in parts of this country. However, in California, folks are trying to jump on this bandwagon yet at the same time, maintain the not so tiny price tag which is at the core of the tiny homes movement. California has a big push with this overpaying mentality. You see this with the whole foods movement. I’m all for eating good and healthy and this is absolutely important and critical to your wellbeing. But paying $15 for a tiny bottle of freshly squeeze orange juice? Either eat a freaking orange out right or squeeze the damn thing yourself! Today we’ll take another look at Pasadena and see what the market has to offer us if we went shopping right now.
Investor buying continues to be a major player in the current housing market. Over the last two weeks I’ve had the chance to drive down neighborhoods were international money is flooding in. It does give off reminders of when Japanese buyers were purchasing tons of California and Hawaiian real estate. When it comes to California, there are certain cities where international money is pouring in. This matters when sales margins are razor thin. What struck me about these areas is the marketing is heavily geared towards international buying. After all, when escrow closes there is no loyalty where the cash is coming from. California continues to draw heavy investor money from China alongside their massive boom over the last decade. Apparently buying tons of consumer goods eventually will have a bigger impact and we are simply seeing money repatriating back to other places. While the US is seeing some signs of housing mania, we are nothing compared to the nutty Canadian housing market and what is occurring in some major Chinese cities. Yet a big part of this is speculation and we actually see this via rents. Rentals are more reflective of what local families can pay. It is interesting to see in some highly desirable areas that rents go for $2,500 to $2,700 while homes are selling for $700,000 to $750,000. Foreign money is a big player in the current market and this is also very dependent on foreign economies sustaining their booms.
As we dig deeper into the summer selling season it is becoming more apparent that this summer is going to be a dud for Southern California. From Compton and Inglewoodto San Marino and Arcadia the insanity has reached another apex. Inventory is growing, price gains are stalling out, and sales volume has certainly fallen. Aspirations are certainly different from what your budget can afford. Whenever I see comments about “people are always willing to buy” I tend to agree. People are willing to buy a $700,000 McMansion while making minimum wage as we witnessed in the last housing bubble. Give buyers enough credit and they’ll go hog wild. When it comes to housing, #YoLo seems to be the motto. The will to own a home will make people do some seriously ridiculous decisions. Need we remind you that 7,000,000 people rolled the housing dice and actually lost their homes via foreclosure just in the last decade? You don’t get any cable airtime for “This Failed Flip” or “Stretching our Budget for a Crap Shack.” Who would you get as a sponsor? Maybe Fancy Feast for the baby boomers lounging in their granite countertop gold plated sarcophagus. The housing market is turning in SoCal yet again. But real estate cycles turn with the speed of a sloth. Will we see a minor correction or something bigger?