It appears that rental Armageddon has now gone mainstream. Nearly a decade ago when the first housing bubble was taking off, cautious buyers lamented about the high prices in many coastal areas as they do today. “But real estate is the only way to get rich!” Okay. Then why not buy rental properties out of state? Of course this largely fell on deaf ears since house horny people only wanted to out compete their neighbors in the race to foreclosure glory. After 7,000,000 foreclosures and with 1,000,000 of those happening in California, most people have forgotten the past. Now we’re left with wonderful selection bias where those who timed the market (either by luck or foresight) are telling others that timing the market is impossible. Some people did buy investment properties out in Nevada and Arizona during the early days of the last bubble but these were largely flippers or people who thought they were wealthy enough to have a second home. Rare was the person looking to buy-and-hold for income purposes. So it comes as no surprise that there are now companies catering to high income coastal investors who realize a bubble is occurring but still want the benefits of owning real estate.
Anyone that thinks SoCal housing is nutty need only look at the Bay Area for how crazy things can actually get when it comes to real estate. The Bay Area has seen some of the wildest real estate speculation and mania that we have ever witnessed in California and that says a lot. We are professionals for chasing fads and spending well beyond any reasonable budget. So it should come as no surprise that the Bay Area housing market is now facing a wall. In general home sales are hitting a big slowdown and house horny buyers are not willing to pay $1.3 million for a crap shack if there is no other lemming in line that will pay more just a few months later. So long as this narrative plays out, the one that proclaims prices keep going up, then the mania will continue. We even see it in the comments here via examples. “Just look at this place” and of course it is some junky World War II built place but the price is astronomical. The underlying message is “see, there are still plenty of suckers that will buy therefore prices will go up.” The Bay Area is now seeing that the pool of lemmings is drying up.
Los Angeles County continues to have the lowest homeownership rate of any large metro area in the country. This is across all data. Los Angeles County has 10 million people while the larger LA-OC MSA includes 13 million since it brings in Orange County. Any way you slice the data, Los Angeles is simply not a friendly place to buy a home and the vast majority of people rent and spend a bank breaking amount per month on rents. There are cracks forming in the system where home sale volume is weak and prices are reaching a short-term apex. What is telling however is that the Great Recession officially ended in the summer of 2009 but the homeownership rate continues to decline for L.A.
The economy and stock market definitely go in cycles. Real estate was largely immune to this up until the late 1990s when creative financing was introduced into this largely boring sector. Aside from pocket bubbles and localized frenzies, real estate was a fairly drab and reliable asset class. That of course has dramatically changed. People forget about cycles and I am consistently reminded of Black Swan events. Over 7,000,000 people lost their homes to foreclosures over the past decade. 1,000,000 of these were in California yet somehow, the nonsensical drumbeat that buying a home is always a good deal is being echoed by house humpers. Back in the last cycle there were investors from Nevada and Arizona and they were simply adamant that no bubble was possible. “These places rent out and cover the loan!” Until local economies got hit. Or they were able to flip in a short period and make a good amount of money. Until prices went down. Some seem to think banking is fantastic again and fail to look at what just happened with Wells Fargo. Yeah, everything is Kosher. That time was different. Yet this time, it is a stable market even when magnificent crap shacks in the Bay Area are going for way above one million dollars. Cycles in real estate are now a thing thanks to the massive debt fueling this machine.
California’s housing affordability is once again in an unreachable level for most working professionals. You get Taco Tuesday baby boomers jawboning their children to purchase a modest home but that turns out to be a rundown crap shack costing $700,000. So many California adults live at home with mom and dad since rents are also high. Redfin put together some data showing that only 17 percent of homes in California are affordable to an average teacher with an annual salary of $73,536. When looking at the data you will see that the coast is becoming an even more expensive enclave and many homes are being bought by investors, foreigner buyers, and dual income households. The last group is the one that is in the position for a large shock since they are buying in many cases to pop out a brood and largely don’t factor in the cost of childcare once the little ones come into the world. But like most things in California, people live on the absolute financial edge and that edge just got much closer.