Last week I was driving throughout the Inland Empire and one thing becomes rather apparent. There is a ton of building out in the Inland Empire – this applies to work on freeways, new housing communities, and new commercial development. Also, traffic is a nightmare. Westside traffic is also horrendous. There are many people that make the commuting odyssey each day from the Inland Empire into L.A. or O.C. and that commute is only going to get worse from what I was seeing. I was also in the Bay Area recently and prices there defy gravity. In the Inland Empire you can get a McMansion while in the Bay Area you will get a crap shack for one million dollars if you are lucky. It really boils down to a lack of housing inventory and uncertainty that has made builders anxious since the housing bubble is fresh in their collective memories. But alas, the public is drawn to housing like moths to the light. Being stuck in mind crushing traffic for a brief period only highlights that people are willing to sacrifice quality of life for a piece of the American Dream.
The housing recovery has really been an odd one. It has been driven by low inventory, anxious builders, and an army of investors. In the end what has occurred is that the homeownership rate is near a generational low, we have 10 million new renter households over the last decade, and home prices are up on relatively low sales volume. How can there be big sales volume when inventory is so constrained? It is a good question to ask. In any market you will have periods of capitulation, where people simply give in. You see it happening in this market where people purchase crap shacks as if taking their medicine when they were a child. The place physically sucks and is overpriced but hey, you need to do it because mommy told you it was the right thing to do. We’ve been in a holding pattern for a couple of years yet last month, sales did take a rather big drop. It was the biggest drop since April 2011. Is this simply an anomaly or are people priced out?
Los Angeles County is massive. It is also a renting majority county. L.A. County is the least affordable county based on price-to-income ratios. And when things get out of control, all of a sudden every area is gentrifying and every property is one step away from being a Taj Mahal. This summer the housing hounds have been released and all of a sudden real estate is the greatest deal in town. Housing can do no wrong and for those priced out, you must dig deep in those wallets and make that bet! You only live once! Carpe diem. No one ever regretted buying California real estate aside from all those that regretted buying California real estate. Today we’ll take a trip to Huntington Park. According to the real estate gods, gentrification should be happening in every niche of L.A. County.
One of the biggest pitches about buying real estate is the inevitable buildup of equity overtime. Of course the data usually used shows people staying put for 30 years instead of the real world figure of an average of 13 years. Lives change. People move. Jobs come and go. Millennials are largely staying with parents and there must be a way to get them out. In the Bay Area, you always hear politicians saying something like “it is hard for a teacher or fire fighter to buy a home” but rarely mentions that the typical crap shack will cost you $1.2 million. Since when did “middle class” jobs demand living like a millionaire? But never fear. The wonderful ideas of a mania are now popping up left and right like incredibly low down payment loans and a new one, crowd funding your down payment.
The latest homeownership rate figures show an interesting dichotomy to the housing market. While prices are up, the homeownership rate is down. And down significantly. The homeownership rate is now at levels last seen 50 years ago (the latest figures are the lowest in a generation – each update seems to bring a new low). This flies in the face of all the house humping that is being pushed out into the market. What we do know is that Millennials are simply not buying numbers in any “pent up demand” form. In fact, a record number of Millennials are living at home with at least one parent. The data is interesting since the drive is being pushed by older Millennials, those that should be buying. Younger Millennials are likely in college accumulating back breaking levels of debt. There has been research showing that student debt is a hindrance to buying a home. So are we simply creating a new generation of boomerang kids?