I always found it fascinating that one of the most toxic mortgage products ever created, the option ARM was pushed heavily by California banking institutions. Places like WaMu, Countrywide Financial, First Fed, and other bygone institutions were heavily into this crack for housing mortgage. The premise of the loan was to free up cash for big money households. Of course, the unstated mission of the product was to push volume in a market where prices were out of reach for regular households yet boosted profits for banks. There simply wasn’t enough of those big income households (and they certainly weren’t buying in Torrance or parts of Pasadena). Today we still have only one out of three California households able to afford a house in the state in which they work and live. So it is no surprise that for the last half decade, one of the biggest buyers of homes in California has come in the form of investors chasing yield. Never have we seen such a high level of consistent buying from the investor class in the state. This has helped to mask stagnant incomes and has been a major player in pushing prices out of reach for most in spite of incredibly low interest rates. Trulia put out a “bubble watch” report and what a shock that Orange County and Los Angeles County lead the list in bubbliest looking counties in the nation.
Los Angeles County by far is the most populous county in the entire country sporting over 10 million people. People tend to forget that L.A. County is also a renting majority county. This is a big deal for the biggest county in the nation. For comparison, the second biggest county in the country is Cook County in Illinois with 5.2 million people. I was reading a few articles this weekend focusing on migration patterns across this country. L.A. County drew in the highest number of international migrants between 2012 and 2013. As we know, a good number of people from abroad are purchasing real estate across the Southland in prime locations. L.A. County added 39,000 international migrants from abroad between 2012 and 2013. A small number for the region yet this has an impact on pricing since purchases are largely targeted in very select markets with air tight inventory. Another trend that is occurring is the boom in Texas. Texas is seeing tremendous growth from domestic and international migration. Some of the healthiest housing markets in 2014 show up in Texas.
We have a large readership from California but also many others that simply enjoy peeking into the mania that is SoCal real estate. It must appear to an outsider that all Californians ever think about is buying, selling, and flipping real estate. During certain periods of time the mania gets out of hand and the delusion runs rampant across the L.A. River. We reach certain stages like today where prices are reaching limits in certain areas and people are no longer clamoring at every open house like a hungry house lusting lemming. Inventory is picking up as would be expected to start the spring season but also because investors are finally pulling back from their half-decade long binge. It is useful to look at actual home prices and what a certain amount will buy you in today’s market. Are prices justified? For many that question is merely answered by what a buyer is willing to pay. Can you fault a seller for trying to get as much as possible if a buyer is willing to foot the bill? The challenge with California real estate is that in order to reach healthy payment levels in certain targeted areas, a large down payment is required to make any economic sense. I can tell you that investors realize that any property will cash flow as long as the down payment is big enough. So what does $500,000 buy you in Culver City, Pasadena, and Riverside today?
California housing affordability may seem like an oxymoron. Many younger buyers are priced out in many markets across the state. The latest data from the California Association of Realtors (CAR) finds that still only 1 out of 3 families can actually afford to buy a home in the state in which they live. We also have a record number of young potential buyers (more likely potential renters) living at home with their parents. Starting in 2008 a large portion of housing sales started going to investors. These investors may have different timelines on when they will release property out into the market. In fact, this might be another big reason as to why so little inventory is out in the market. Some investors are looking to securitize cash flows and may be limited in terms of selling. Instead a regular buyer potentially looking to capitalize on equity and move up in more traditional times, you have different motivating factors. Since 2008 over 30 percent of all California home sales went to this group. Another group is baby boomers locked into their golden sarcophagus. This group from what I have found for the most part is house rich and cash poor. The notion that many will sell and cash in their lottery ticket is simply not happening in the market. Many are seeing kids move back home, many still have a desire to keep their place (even if it means living in an area gentrified by dual high income households/investors), and finally a large growing rental base. In essence the continuation of California becoming more feudal is still very much intact.
Inventory is finally starting to show up in the California housing market. The main motivator of this growing inventory is the delusional prices being asked by sellers are no longer generating massive amounts of sales from house lusting buyers. In other words, sky high prices have caused many homes to sit on the market longer thus allowing for more inventory to accumulate like a queue forming at a Disneyland ride. Can’t blame the sellers if suckers are lining up to hand over their cash for a mortgage albatross. The rapid increase in prices uncoupled from wages has left many California household unable to afford current prices. House lusting Californians are either hot or cold on real estate. Rarely are emotions in the middle in this manic state. The market has been sizzling for the last few years mostly because of speculators and Wall Street hot money flowing into the market. Sales volumes are incredibly low thus reflecting a distorted market. Those lusting for houses will simply dive in regardless of larger macro-economic trends and are largely chasing past gains as a predictor of future trends. It is no surprise that inventory is rising and prices are stalling out. Those “all cash” sales still remain a big part of the market.
California’s housing market is a boom and bust machine tuned to attract the masses. Timing matters in a state where speculation is rampant. Since 2005 California home owners have received over 2,000,000+ foreclosure notices. Of course this goes into the graveyard of foreclosure information that we seem to forget each time the market booms. Since 2000 with shady mortgages, Wall Street financial shenanigans, and the Fed’s low rate policy the housing market in California has only entered into a more pronounced boom and bust carousal. People go into a deep herd mentality that fails to acknowledge even recent history. If you timed the market say two years ago and went with the record low rates at the time plus lower prices, then does that mean prices today are too high at 20 to 30 percent increases with interest rates 100bps higher? That $500,000 home probably worked at low rates but what about it at $650,000 with higher prices? Incomes certainly did not keep pace. Investors are still buying roughly 30 percent of inventory. This group is also slowly pulling back and it should be no surprise that inventory is rising and prices are actually stalling out. Since 2000, the California housing market is a wild ride of speculation. Buying and selling is a matter of timing, luck, and larger macro forces at work. We acknowledge this and for most, buying or selling is a decision that needs to be made in real-time. Is it a good time or bad time to buy today based on my specific factors? Yet let those 2,000,000+ home owners who got a taste of the foreclosure process serve as a warning that not all purchases are golden in the Golden State.