There is little bragging that goes on when a poor financial decision is made. You rarely hear about the person that invested a sizeable portion of their retirement account into AOL at the peak or going all in on Enron. The same applies to housing. We are seeing chatter reflect that of 2005, 2006, and 2007. Justifications are different but some people seem to feel they bought at the “perfect” time. Just for the sake of curiosity I ran the numbers of total foreclosures since the crisis began with the housing peak in 2006. In total, 7 million Americans have been served with the bitter taste of foreclosure. On the flipside, since we know that roughly 30 percent of all purchases have gone to investors and Wall Street, we can say that probably over this same period 2,000,000 homes are now in the hands of some sort of investors (i.e., big money, small money, foreign money, and second homes). You also have to wonder how many of these people that lost their homes in foreclosure are itching to get back on the horse and buy again. Credit standards are fairly tough for getting a loan today even though rates are low. And those with the credit and income are battling it out in flippervilles where “all cash” is dominating the scene. There are likely some permanent structural changes that are a result of a stunning 7 million foreclosures.
California is a land of booms and busts. Generations ago gold rush fever brought many to speculate and gamble for future glory. In the 1900s the promise of uninterrupted sun and great weather lured families to the area. This trend has only magnified with global forces becoming so dominant and people fully connecting and thinking alike on the technological hive mind. In other words, people are seeking the same goals and dreams. People also love speculating on real estate. Language is hardly a barrier when documents can be translated in the click of a mouse button. California housing is leaving many middle class families behind as the state gentrifies dramatically. Reports are very clear, and that is only one out of three California families can actually afford to purchase a home at today’s prices. Yet the market is attracting investors from all across the country and world. People are willing to leverage their income with low interest rates and funnel upwards of 50 percent (or more) of their household income into real estate. What is interesting is that in many “prime” areas housing prices are inching back close to their former peaks. Yet working class areas, only a few miles away from these markets are still years away from reaching their former peaks. California is a magnifying glass to the slow erosion of the American middle class.
Housing is an industry made and broken at the margins. This is why in areas like Beverly Hills or Newport Coast, a small number of sales can skew prices dramatically. Housing prices in more homogenous markets where many homes are built in cookie cutter fashion provide a better metric of future appraisal values. How so? If you have a builder building 1,000 identical homes in Las Vegas, it is hard to justify that your 3 bedroom 2 baths home at 1,500 square feet is valued more than an identical one next door even though you might think it is worth more. Also, housing is the biggest purchase for most Americans. You may buy multiple cars over your life but not many homes. This is why the measures to control inventory by banks and the flood of investors has tilted this market into unfamiliar waters. High prices in the face of very low inventory. People struggling to pay mortgages yet banks having no issue buying up a large portion of single family inventory. Given that the Fed is the mortgage market, are we seeing a minor (or major) portion of price fixing in housing?
Americans like to believe that they are movers and shakers and will follow the opportunity wherever it may be. The idea of selling your home and moving across the country for a great new job opportunity seems to be a common notion of how things happen. However the data shows us a very different reality. Americans are largely staying put. We can blame this on negative equity but this trend actually goes back to the 1980s. In fact, American mobility is at all-time record lows. What this means is people are staying put like our golden handcuffed baby boomers. I was thinking about this carefully and I think one major reason for this is the massive subsidies given to homebuyers creates incentives for staying put. Think of California with Prop 13 and the ability to write-off many housing items including interest when being a homeowner. The system is setup to keep people locked in. For a young person in a high cost of living area the best economic option may be to move and start in another state. However the facts point to a very different picture.
The blame game is now out in full force for the slow start to housing in 2014. Nationwide, we’ve been hearing about the polar vortex impacting real estate. Unfortunately it cannot be applied to California given that we’ve been in a full on drought. Winter never came to SoCal. I can’t remember a year with such little rain but hey, who needs water when you can purchase a World War II Cracker Jack box for $750,000 right? Like in most manias, the folks on the ground are the last to get the memo and many are still going out for ARMs to stretch their already impaired budgets. In 2004 one thought that was inescapable to me was the incestuous nature of real estate that was unfolding. That is agents, brokers, banks, builders, home owners, home buyers, Wall Street, tax collectors, and everyone tied to the machine got a mega-boost thanks to ever accelerating prices hikes. Few thought about what happens when a reversal occurred especially since incomes were not going up. The same has happened over the last few years in more subtle ways. The economy is weak and a big boost has come from home prices going up. Yet much of this is now driven by Wall Street and hedge funds. Housing is off to a slow start in 2014 and you can’t blame it on the polar vortex, especially here in a sunny and drought hit California.
I think it is safe to say that investor activity in the housing market has changed the face of real estate buying. Back when the crisis hit in 2007, some analysts were cheerleading the hedge fund crowd as a tiny blip in the market. It is hard to call it a blip when 30 to 40 percent of all purchases are going to investors for close to half a decade. A recent analysis from RealtyTrac found that the estimated monthly home payment for a regular three bedroom home (costs include mortgage, insurance, taxes, maintenance, and subtracting the income tax benefit) rose an average of 21 percent from a year ago in 325 US counties. What about household incomes? That is another story. So it is no surprise that we are largely becoming a nation of renters. It is also no shocker that young households are largely unable to begin household formation via buying a home. Many are living with parents well into “young” adulthood. For the first time in history, we had a six year stretch where we added more renter households than that of actual homeowners.