The kids are not moving out. The high cost of housing is having a big impact on the Millennial generation. In high cost areas you are seeing homes being sold to investors (including foreign buyers) and those that do buy as owner occupied tend to be a lot older than previous first time buyers. Even from family and friends it is interesting to see a few homes sold in their varied neighborhoods only to be turned into rentals immediately – these were very standard single family homes in neighborhoods where rentals were rare (not anymore). Yet another continuing trend is the number of working age Millennials living at home with mom and dad. Mom and dad are your typical Taco Tuesday baby boomers and are “shocked” that their kids can’t afford to rent let alone buy a home. Given current prices Millennials are not going to be buying in many high priced markets for years to come.
How extreme can the housing situation get? Can things get crazier? Probably. Are people in SoCal living in a warped bubble thanks to everyone thinking they are some kind of marketing guru? When you look at the rental revolution, the answer is a resounding yes. We live in a world where Black Swans are common even though by definition they should be extremely rare. Just last year, the notion of Trump being the Republican candidate would have been dismissed. Yet here we are. Bernie Sanders? It was going to be Clinton and Bush with no outside surprises. The establishment is blind and most people fall into lemming like behavior. You are either an “R” or a “D” but in the end, the establishment on both sides is virtually the same when it comes to finances. In housing the amount of sheep like behavior is amazing. This is how we get people renting out vans and RVs as if they were luxury rooms. And that brings us to a current trend in the housing market: extreme rental living in Los Angeles.
It was no surprise that for the fourth consecutive year, building of multi-family units outnumbered single family construction in California. This is part of the renting trend that has gone on for nearly a decade now and builders are merely catching up. One interesting finding in the data is that for Orange County. In Orange County one city accounted for nearly half of all new homes, condos, and apartments over the last six years. That city is Irvine. What is interesting with Irvine is that parts of the city are being built to cater to a foreign audience. Certain subsections are seeing 80 percent of properties sold to international buyers; we are talking about new homes that are selling for $1 million or more mostly in all cash offers. It is an interesting trend. But what is even more telling is that most of the construction in Irvine was for apartments and condos. Even in an affluent market the renting revolution is occurring.
The renting revolution continues in Los Angeles. For the first time in history the City of Los Angeles tops 4 million people. Much of this growth of course is being supported by sardine like living in multi-family units. Which of course, is only going to add to additional traffic congestion. But who cares! Prices went up and that is all that matters. Quality of life be dammed. L.A. is consistently ranked as one of the worst places for traffic in the entire country. House horny enthusiasts of course will try to use this data as some kind of great thing but in reality, even for those buying homes in the city you will still need to access those roadways which are now going to have more people on them. And yes, it is very likely those people are going to be renters since L.A. and L.A. County in general is a renting majority county. It is amazing to see the population of L.A. now top 4 million. I can’t wait to jump on the 405, 10, and 5 freeways with all these new people!
It is common wisdom that prudent investing requires diversification. If you were saving for retirement, you would want to buy a pool of funds to spread out your risk. This is why many people will buy index funds that represent the market. Sure, you only hear about the superstars that bought Google or Microsoft at an early stage but you don’t hear about the many more failures. Consider this survivorship bias. So it would be foolish to have your entire portfolio riding on one stock. Yet some people have most of their wealth locked up in one piece of property in one locked in location. Taco Tuesday baby boomers in high priced areas are sitting on an equity goldmine but many are unable to tap out their lotto ticket without selling their property. Yet when owning real estate diversification also helps. You don’t know if you have a future Detroit or San Francisco in your hands. Yet some people mistake blind luck with fortune telling capabilities. Housing right now is inflated when looking at historical data.