There is a fine line between using debt wisely and being a slave to crippling loans. Unfortunately most Americans have used debt as a meal replacement for actually saving and are now entering their older years with very little saved. Liquid asset anorexia. It should be telling that purchasing a car, an item that depreciates the instant you set your rear in the leather seat, has some of the easiest financing the world has ever seen. Zero percent loans are common but when you look at the underlying price tag, the cost is actually very high. College loans are given to students with zero income on the future prospect they will generate enough income to carry their loans. Not a big deal when you take on $5,000 a year but what about $40,000 a year? As we are seeing, many young adults are having to move back home with mom and dad as grown adults merely to pay their bills, many times in car loans and student debt. A similar phenomenon has occurred in housing where base cost is very high thanks to cheap financing. Low rate mortgages still cannot force demand if people are unable to service the debt. That is the problem we now confront today. It isn’t a question of the raw number in population growth. If for every doctor or engineer we create 10 to 20 McJobs, then where will the housing growth be? Homes are unaffordable even in the face of record low mortgage rates.
While the heat wave continues in SoCal drawing out the summer, there is little momentum from the 2013 real estate bonanza. Sellers with their awe inspiring wisdom are finding that no, they simply cannot ask for delusional prices on their stucco box crap shacks. As it turns out, a large number of sellers need to cut asking prices to get interest on their properties. New data shows that in Orange County, the most expensive SoCal county, one-third of sellers have chosen to drop their asking price. Some sellers of course are opting to pull their properties from the market with the hope that next spring, a new breed of sucker will be out in the market ready to plunk down $700,000 on a dumpy pad. In reality, many buyers just don’t have the cash to support current prices even with historically low interest rates. Given the option, many would buy if they had the means to do so. Instead, you have a large number of adults living with parents enjoying meals of Fancy Feast with a glass of Kool-Aid since they don’t even have the deposit for a rental, let alone a down payment for a home. The renting trend is moving along steadily. The market is so hot in SoCal that sellers are now having to lower their asking price.
The nation is undergoing a radical transformation where renting is currently outpacing homeownership. The reasons are complex including the multi-year investor orgy into single family homes. Since the crisis hit 7,000,000+ homes have been lost due to the long and drawn out process of foreclosure. No need to worry since investors picked up a solid portion of the slack here. Americans are notoriously bad savers and addicted to debt. For most, housing is a forced savings account. This is why when net worth data is pushed out we find that homeowners clearly outperform renters. It is important however to keep in mind most of the net worth is tied up in equity. That is, you will need to tap your home somehow to get the money flowing out. This is how we end up with dumpster diving baby boomers scrounging the local Whole Foods for goodies while living in a million dollar crap shack. The hipster kids don’t seem to mind since they are now living with mom and dad, unable to afford the high rents in places like California. Yet housing overall does end up being a big forced savings account and that is why the net worth figures between homeowners and renters are not even close. If anything, it adds more evidence to the feudal landlord nation we are witnessing.
Follow the big money has been an adage on Wall Street for many decades. If that philosophy holds true for real estate as well, big money investors are signaling something regarding California real estate. Big investors have entered the single family housing market in a way that is unparalleled in history. We truly are in uncharted waters here. It is clear that the investors pulled the market up from the graveyard and gave it a substantial boost. It is no surprise then, as investors exit the California housing market that sales have waned and inventory has slowly started to pick up. A good way of seeing big money demand is to look at purchases made under LLCs or LPs since these are your big money Wall Street and hedge fund players. They are interested in deploying large sums of money versus your crap shack aspiring flipper or buyer. What is clear is that large buyers have pulled back in a dramatic fashion.
Rinse and repeat. That seems to be the mantra some flippers are adhering to in certain SoCal neighborhoods. Some zip codes seem to attract flippers like flies to a bright light. Eagle Rock is one of those markets. Nestled between Glendale and Pasadena, Eagle Rock seems to be a siren call for hipsters. What I find interesting in these hipster hoods is that they try to pitch a frugal eco-friendly lifestyle yet carry a massive mortgage. Okay, you are growing tomatoes and radishes but now have a mortgage on a $700,000 crap shack. Seems like cognitive dissonance especially when you are getting such a tiny living space. Hipsters seem to be buying it up but the market is now cooling off. Apparently living in a closet and having a tiny garden isn’t so appealing when you look at the underlying price tag.