It is common wisdom that prudent investing requires diversification. If you were saving for retirement, you would want to buy a pool of funds to spread out your risk. This is why many people will buy index funds that represent the market. Sure, you only hear about the superstars that bought Google or Microsoft at an early stage but you don’t hear about the many more failures. Consider this survivorship bias. So it would be foolish to have your entire portfolio riding on one stock. Yet some people have most of their wealth locked up in one piece of property in one locked in location. Taco Tuesday baby boomers in high priced areas are sitting on an equity goldmine but many are unable to tap out their lotto ticket without selling their property. Yet when owning real estate diversification also helps. You don’t know if you have a future Detroit or San Francisco in your hands. Yet some people mistake blind luck with fortune telling capabilities. Housing right now is inflated when looking at historical data.
Everything is relative. I’ve known a couple of wealthy people that live in nice neighborhoods but their home is modest to the area. It is modest because even being wealthy, they live among even wealthier people. So their Mercedes which is a fantastic car looks like a Pinto next to Ferraris and Aston Martins. They actually feel as if they are not doing well but in reality are in the top one percent of the nation. This is the current situation in the U.S. where crap shacks across the country suddenly appear better than they are because of a lack of inventory from a manipulated and distorted market. Housing inventory is low in the U.S. At open houses you see lemmings trying to make offers on beat up shacks waiving inspection rights just so they can “own” a property with a 30-year mortgage of course. It is manic. There is a sense of panic in the air. You also have Taco Tuesday baby boomers living in inflated shacks trying to rent out rooms via AirBnB so they can go out to Whole Foods and buy some kale and raw milk. Builders are not building because of NIMBYism policies in many cities around the country. So what happens is millions of households become renters and those lustful enough to buy are diving in at what appears to be a peak.
Typically at the height of any bubble, you have housing cheerleaders talking about a “new normal” as if they have magically figured out a new secret. California is a land of booms and busts. We just had a boom. So counter to all of the history we have and common sense, somehow there is no correction to follow, this time. That is the logic. First, you have the idea of ignoring income. Second, you have the idea of every area being a candidate for gentrification. Finally, you have the “if you can’t afford it, leave” argument. Forget about any Black Swan like events that are bound to happen. The middle class is already leaving, many into inland areas of California but many to more affordable states. Many house humpers use emotion to base their arguments. I understand this. Go to any open house and you have people looking like lemmings trying to buy a home. Most of the time, there is this deep source of desperation in their eyes. You do realize you are locking yourself into a crap shack for 30 years right? That is assuming many can compete which they can’t (hence the domestic out migration). Many are leaving to places like Texas. Texas as you know has incredibly affordable real estate relative to SoCal. And SoCal domestic residents have figured this out.
Americans are realizing something is wrong with the system. You can see it this year with the rise of outsiders in both political parties. People realize the system is rigged. Instead of some folks that kowtow and simply move forward like subservient lemmings, millions are mobilizing and taking action. Many are voting with their wallets. The number of renter households has increased by 10 million over the last decade while net homeowners has been stagnant. The bailouts were supposed to help American families but what happened is that many were kicked out of their homes (for missing payments) and then giving them to banks that also missed much larger payments (too big to fail). People got a quick education on how things work. This is why the homeownership rate fell dramatically yet somehow, homes sold to investors and now rents are at all-time highs while incomes are stuck in neutral. This is a major problem and people are taking notice.
Every time a housing bubble forms you get the same typical housing cheerleaders talking about massive gentrification. Many areas have gentrified in dramatic fashion but at the end of a housing bubble, you start seeing wild prices in areas where it is questionable if gentrification will or has occurred. In Southern California, the trend has been unrelenting to adding renter households. Some think that raising the minimum wage to $15 is going to inflate housing prices but this is simply nonsense. All this does is eat into more disposable income – that Big Mac will cost more or Taco Tuesday won’t be such a bargain. As if this new push will allow people to buy $700,000 crap shacks. When you read reports on housing from the media you get a deep sense that they’ve never been out to many of the zip codes in L.A. County. Take a look at an area that is very frothy but rarely talked about. Paramount.