Historically low interest rates and artificially low inventory has helped to boost home prices but the homeownership rate is in perpetual decline it would seem. There is a tendency to forget that the rise in home values was largely driven by uncharacteristic investor demand for many years. This multi-year buying has resulted in many homes being taken off the market only to be turned into rental units. The numbers are staggering but they are worth repeating: we have added 10 million renter households over the last decade while being neutral on actual homeowner households. The math is derived from the grim reality that since the crisis unfolded we have witnessed 7 million Americans undergo the process of foreclosure. This flies in the face of the constant drum beating that somehow buying a house is a sure bet. With most things financial, you have this survivorship bias where those that got smoked out of the market are silent while those that got lucky or timed the market correctly constantly voice their perspective. Yet things are good until they are not.
The morning news is now covering how unaffordable Los Angeles housing has become. Just this morning there was a story about rental prices increasing the prevalence of poverty in the area. Apparently this is somehow going to resolve itself even though cracks are now starting to form in the economic landscape. There is now a band of people that seem to have this odd idea that everything economic and politically oriented is about keeping prices up for their crap shack. You can have a story about an “asteroid set to destroy Earth” but they would respond by saying “but even if the meteor causes prices to drop 10 percent, it will always go up later.” By the way, a 10 or 20 percent down drop equates to $70,000 or $140,000 for a typical Taco Tuesday crap shack. Today I’m going to ask readers to dig into this story a bit more because I’m not exactly sure what is going on with this Torrance property.
Some people forget how economic corrections occur. Stock markets usually get hit first while real estate comes limping along. Real estate is like turning around a giant ship in the middle of the sea. Once it is on course, it usually stays on the path for some time. Here in California, we’ve been enjoying one of the biggest bull markets in our generation and a big part is being driven by tech company valuations. Just look at San Francisco for the idealized example. Yet an odd thing has happened and much of the young talent is priced out of the market when it comes to buying. You have old timers that purchased years ago or you have non-local buyers chasing after properties. Millennials are getting sucked into the rental Armageddon trend. The most unaffordable location is Los Angeles not tech driven San Francisco. Let us take a look at what happens when large metro areas become unaffordable to actual young workers.
I’ve been tracking data throughout the Southland for well over a decade. The most expensive county in SoCal is Orange County. Home to the Real Housewives of Orange County and regular guest on flip this house shows. Inventory has been rising strongly in Orange County for the last year. It is hard to tell when inflection points hit but the same capitulation and language I’m hearing today is similar to what was being said in 2006 and 2007. Keep in mind everything looked great on paper in 2007: low unemployment rate, record house prices, and a peaking stock market. People were buying saying “it seems like we reached a new plateau.” The same trend is hitting the market today. The median price of a home in Orange County is only 7 percent off the all-time high reached in 2007. The peak price was reached in June of 2007 and we are inching closer to that point. Sure we don’t have those insane toxic loans but we do have maximum leverage courtesy of low rates. We also have foreign money in the market at levels never seen. Once again, this is uncharted territory. It might be worth looking at some history.
The state of California has a tax structure that is inherently in favor of stock and asset bubbles. The biggest sources of income tax for the state include personal income tax, corporate tax, and sales tax. These sources are completely dependent on the health of the overall economy and can turn on a dime. Compare this to a state like Texas that relies much more heavily on property taxes that tend to remain more stable even in recessionary times. But when times are good, the state of course manages a way to spend the money that is coming in. The current housing market is pushing out the middle class but money is flowing into central coffers so all is good. The Board of Equalization shows the big jump in real estate values across the state. Total state and county assessed property values are up to $4.918 trillion, up 6 percent from last year. By the time it all implodes, “I’ll be gone and you’ll be gone.” How stable are the tax sources for California?