Household formation is an important indicator of future housing demand. One of the big reasons why home builders have been tepid about building homes in the face of a growing population and rising prices is that first time home buyers are a small portion of the housing market. The reality is, you need household formation to justify bigger developments instead of investors looking for deals to flip or rent out. Home builders have been busy building multi-family units but these are clearly slated for rentals (the number of growing renting households would justify this). The odd dynamics in the current market have forced millions to live at home. In California 2.3 million adults live at home because of financial reasons, not because it is the new hip thing to do. In San Francisco, even well paid tech workers double or even triple up in apartments or homes to make the high rent affordable. What is probably more troubling in the data is that this trend is holding steady across the nation. Quality employment growth absolutely matters in the face of household formation. In the past, a boom in employment led to natural demand for housing. Today, you would have some believe that juiced up real estate and investor lust is somehow going to be the drawing force that lures cash strapped young buyers into the market. So far, those figures are not materializing.
The summer selling season is drawing to a close and flippers are out in droves trying to squeeze out maximum profits before the fall hits. I know some of you are obsessed with Santa Monica or Beverly Hills but your budget might only give you room for a tiny bright blue 400 square foot place in Pasadena. Expectations people! This is SoCal, land where the notion of property ladder was invented. What would you say to buying in Paramount or Bell for example? You certainly would get more house than you would in Pasadena or Culver City and you are close to city centers. Bell is closer to downtown L.A. than Culver City. After all, everything is gentrifying so better buy now before Compton becomes the next Paris. Even though prices fell in SoCal from June to July and sales have been weak for most of 2014, eager sellers are still trying to get the most out of the current market. Today we’ll take a look at a flip in Paramount and some gentrified prices in Bell.
The housing market without a doubt is slowing down and it should be clear that the “hot” summer selling season is simply not going to materialize. Even in house horny Southern California, sales are down 12 percent year-over-year and the median price actually fell in July from June. Typically, the sunny California sun fries the portion of the brain looking at math during the summer but something else is going on. People also conveniently forget that 7,000,000 foreclosures have occurred since the housing bust hit with 1,000,000 happening here in the “never a bad time to buy” California market. We recently discussed the incredibly hot rental market in the state. It seems that rents are having a good run over the last year as more Americans welcome their new feudal landlords from Wall Street. In fact, we now have the highest percentage of households renting in 20 years. If we look at the data, what we find is that housing is simply consuming a larger portion of income for households. It is amazing how many people in California have absolutely no comprehensive plan for retirement. They are willing to leverage every penny into housing but ignore other important areas like building a balanced portfolio. Taco Tuesday baby boomers sit in million dollar crap shacks welcoming their student debt laden children back home while they feast on Purina Dog Chow. It is pretty clear what is going on right now: more of your income is being consumed by housing.
Do you enjoy sleeping in your closet? Did you ever dream of living in a box similar to your cat or dog squeezing into those tight spaces? Then we have the right homes for you in Pasadena! It is interesting to see how people will justify prices especially on home flipping shows. “I won’t live there but I can see why it makes sense!” “That floor will add $20,000 immediately!” “That tiny bit of work on the lawn suddenly added $25,000 in visual value.” It all makes sense until it doesn’t. For those of us with some life history in California, we realize this is a boom and bust state. Some of you are aware of the Fancy Feast eating baby boomer neighbors who are sitting on a California goldmine but just can’t quit the state. Virtually every other week I’ll get an e-mail about someone spotting a neighbor with so many cars piling up on the outside that you would think they are starting a dealership right on your street. Or what about those broke Millenials and Generation X “kids” moving back home because they can’t even afford the rent? This is the state of the current California housing market. Today I’m going to show you some sub-$500k homes in Pasadena. Sure, you’ll have to forgive the lack of square footage but at least you will be in a prime area!
The rent is too damn high in the Bay Area. I’m sure many families in the Bay Area utter this on a monthly basis as they send their rental checks to their landlords. The median rent in the Bay Area hit $3,200 in the first quarter of this year. The booming tech industry has been a big win for Northern California real estate although for many, it may not feel that way. Investors have been a dominant force as well in Northern California. Investors have been dominating the US housing market for nearly half a decade and are now only starting to show some signs of pulling back. San Francisco is an interesting case study of an area undergoing rapid ultra-wealthy gentrification. The median home price in San Francisco hit $1,000,000. On a monthly basis I will get e-mails from tech workers talking about their two income households being unable to buy in the Bay Area. Interestingly enough San Francisco makes Southern California look like a bargain. What you are also seeing is a deep hollowing out of the middle class in the US but it is incredibly visible in places like San Francisco.