People always mention a few items when it comes to real estate values. For California they highlight location, mileage to freeways, weather, and access to employment hubs. Well if you want a good deal and according to some, every single part of L.A. County is going to gentrify so you should simply purchase in the most affordable zip codes. The argument is that if you get in early on a gentrifying neighborhood, you can make out like a bandit. This logic is usually coming from the Taco Tuesday crowd and those aspiring to purchase a hardwood floor stucco sarcophagus. So today we’ll look at four properties in Paramount and Compton. They meet all the criteria thrown out by the gentrifying crowd. People mistake luck with investing acumen. The 1,000,000+ that lost their California home to foreclosure isn’t speaking too loudly (just like those who bought Enron stock). But when it comes down to buying, they usually want others to take the first step especially in areas that might transition. Let us take a look at some of the deals to be had.
There have been a few reports highlighting that the LA/OC housing market is the least affordable in the nation. A more recent analysis by the Economic Policy Institute (EPI) found that 57 percent of Angelinos fall below a basic budget presented. We’ll show the budget shortly but these kinds of reports highlight the growing divide in many metro areas around the country. Having across the board housing price increases and rent hikes come at a consequence when wages are stagnant. For the L.A. metro area, what we have seen is a big shift to rental households (L.A. County is a majority renting county). People may forget that the cost of living is high in the Southland even beyond housing. Many want to buy in a good school district and many are willing to dive into a crap shack for the kiddos. But many households wind up in the two-income trap; daycare, added healthcare costs, and ancillary school services to keep up with the neighbors. Housing in the form of mortgage payments and rents is eating up a larger portion of disposable income.
There is a reason why new home sales still remain in a slump. New home sales cater to an economy where most family income is rising to support the cost of higher priced homes. In many markets, new homes cater to first time buyers. But the first time home buyer market is mired in problems. In more expensive metro areas you have younger people simply unable to afford rents let alone the cost of a crap shack. In many other parts of the US families are simply dealing with an economy that isn’t seeing across the board wage increases. Low interest rates have to remain to keep the monthly payment static. At least that is what the Fed is hoping for. There was some recent data showing that first time home buyers continue to make up a small portion of all sales. Contrary to some false narrative, many first time home buyers are coming in with low down payments, not suitcases of cash. And for the most part, this is being driven because Americans overall don’t have much in savings and barely enough to cover a dinner at Taco Tuesday with a side order of guacamole if you are being a big spender.
Given every headline we have seen over the last few years you would think that home builders would be out in droves adding new supply to the market. What building is occurring is focused on multi-family units to cater to the trend of rental Armageddon. The new home market does well when the economy is recovering evenly and wages are moving up across the board. New home sales come with a heftier sticker price and most investors are interested in deals, not marked up new homes. But prices are pushing up in most metro areas and rents are steadily moving up. Yet this push is more of a constraint of investor demand for existing homes and not regular families competing with one another as was the case for a few generations. That is why the homeownership rate of today is what it was back in 1984, over 30 years ago. It is also the reason why new home sales are pathetically low. The new home sale market is really the place to look at for a true housing recovery for the masses and nothing is really happening there.
I remember in the 1990s friends getting unsolicited offers for “tech” jobs where the only prerequisite was a basic understanding of computers and some common knowledge of HTML. With these simple skills, you were on your way to tech millions. San Francisco was at the hub of this insane mania. Today people will argue that we now have solid companies like Google, Apple, or Facebook pumping out great jobs for great minds. But I’m also seeing money being thrown at long-shots by venture capital just to see if something sticks. The tech bubble was spurred on by the stock market mania where the public participated. This tech mania is being spurred on by elite private capital. The first housing bubble was accessible to the masses. This housing bubble is available to Wall Street investors, uber-wealthy foreigners, and outlier households with big incomes. The San Francisco median home price now reaches $1 million and the ultimate crap shacks are to found there.