The Bay Area tech driven frenzy continues to march forward with no stopping in sight. If you thought $1 million was too much for a crap shack then $1.3 million is going to be out of your price range. The tech gentrification is getting more aggressive and is pricing out people at an astonishing pace. We’ve noted the out migration of native Californians to other states is much larger than people suspect. Foreign money and high income households are the power players in these niche markets. This is simply a fact but also is tied to the bull market that has now entered into its eight year. There are now signs that we are reaching a plateau but this system only understands two states: boom and bust. There is nothing calm about the way our real estate system is now structured. It is about fast gains or big losses. All or nothing. You are either riding the big wave or crashing in fantastic fashion. People forget cycles and have the long-term memory of a gnat when it comes to these things. The Bay Area continues to drink from the cup of housing mania.
California is a high cost of living state. That goes without saying. Yet the level of affordability oscillates up and down with the whims of the bubble economy. As of today the state faces a rental Armageddon trend where many families simply cannot afford to purchase a gorgeous, sturdy, and well-designed home (just kidding, most can’t buy a 700 square foot funky looking crap shack). Whenever people even hint at the expensive nature of California the yelling begins with “then move out!” or “buying always makes sense!” which seems interesting since the housing market really got out of control in many metro areas starting in the late 1990s as Wall Street injected its casino antics into the industry. And many of those that protest the loudest are usually Taco Tuesday baby boomers living in granite countertop paradise that wouldn’t have a chance affording their home today if they had to pay current prices. But in reality, many are moving out. From 2000 to 2015 more people left California than moved in from other states. The biggest destination is Texas.
Rental Armageddon hits the ballot boxes in March for Angelinos. One measure that hits particularly close to home is Measure S, dubbed the slow growth measure and sought out to curb large scale development. Now as you are aware and we’ve noted before, Los Angeles County is now a renting majority county. Most of the people that live in the area and haven’t purchased are priced out in terms of owning a home. So it should come as no shock to Taco Tuesday baby boomers who bought “back in the day” that large scale development is going to be the future even if it interferes with them getting lit mid-afternoon. Measure S lost because most people rent and don’t give a crap about your crap shack in Culver City or any other West L.A. hood. In other words, L.A is going to get even more crowded and sardine packed.
The bread and butter of any healthy housing market is having a good amount of first time home buyers. That is what drives new home building and also allows for the homeownership rate to go up. Most of the new household formation since the bubble burst was largely done through new rental households. Institutional investors pulled back from the market starting in 2014. Yet the homeownership rate continued to decline. So who stepped in to fill in this gap? Some of it was filled by first time buyers going in with low down payments thanks to FHA insured loans. But a large percentage was made up by mom and pop investors with a lust for HGTV and their dreams of becoming flippers or landlords. In most manias, once mom and pop are diving in with gusto you really need to think about what is going on. I know Taco Tuesday baby boomers are looking for a little “excitement” in their lives and putting habanero salsa on your Chipotle burrito isn’t going to cut it. So why not take the biggest risk by buying real estate when prices are near a new high?
San Francisco tends to put Southern California to shame when it comes to real estate mania. The tech driven frenzy in the Bay Area is something to behold. What is so interesting is that San Francisco, being the hippie and alt-culture hub back in the baby boomers heyday, is now fully gentrified by tech and investor owners that really have little to do with the hippie and art subculture of the area. I mean how many hippies can afford a $1.3 million crap shack? The Bay Area continues to defy gravity when it comes to prices. People are having to “drive to qualify” if they aren’t the DINK tech couples or investors with large pockets. Of course by definition the ultra-wealthy are a small part of the market but with few properties for sale, if they have a desire to buy they are going to buy. This is why you hear of stories of Google employees living out of vans even though they make what most would view as a fantastic salary. San Francisco continues to march on a unique path.