Foreign money has been a key ingredient in propping up home values in many cities across the United States. There is no doubt about this. If you look at places like Irvine, many new home communities are being sold largely to investors from China. This also applies to house mania happy San Francisco. Yet even if you question your own sanity regarding California crap shack prices, things may look affordable to certain people abroad. The amount of investment flowing in from China into the United States is amazing. A large part flows into real estate. This is how you get lower homeownership rates and also a drop in mortgage application volume yet somehow, you see home prices surging on low inventory. In a global market money can flow in and out of systems easily.
Who doesn’t love a great sequel? The housing market is blistering hot and people are itching to get a taste of the hot porridge served right from an upgraded stainless steel stove. You all know the story of Icarus and the perils of flying too close to the sun. Well there is also a story about getting too deep into the crap shack Kool-Aid pool. This is now a mania. I have a fairly good sense of Southern California living in multiple parts and making it my job to understand various markets by actually visiting open houses in wealthy areas and gentrifying markets as realtors would like to say. Most people like staying in their confined bubbles and really don’t venture out. So once again, we see astronomical prices decoupled from actual value. Today we take a trip into the heart of Los Angeles.
Have you heard the good news brothers and sisters? The housing ATM is now back in working order. Hallelujah! Black Knight Financial Services reported that in Q4 of 2016 44 percent of refinances were cash-outs. Meaning, people are now using their homes like ATMs which flies in the face of all the house humpers who continually act as if people are acting prudent in buying crap shacks. No, people are sucking on the teat of housing mania and now they are drinking from the nectar that is being produced. This percentage was the highest level of cash-outs in the last eight years. What was happening eight years ago? The housing market was imploding in epic fashion and nearly 8 million people lost their homes to foreclosure. Many lost their homes because they took out HELOCs and Home Equity loans to live beyond their means. I have to make this point since people always forget – the vast number of foreclosures happened on traditional vanilla 30-year fixed rate mortgages.
It is now official that the United States has turned into a renter’s paradise. Think that is hyperbole? Fifty-two of the 100 largest cities in the U.S. are now majority renter in terms of household composition. And there is no clear pattern here. You have places with incredibly affordable housing like Detroit tipping over into the renter majority category at the same time places like affluent Irvine have tipped over as well. Bottom line, more renter households are forming at a time when real estate values are once again peaking. And where did all of these renter households come from? Well between 2007 and 2016 nearly 7.8 million people lost their homes to foreclosure. Of course this flies in the face of the #YoLo real estate movement and the mantra of “always be buying” real estate because heck, even our current president is a real estate mogul, therefore buy. People have massively short-term memories when it comes to financial spankings.
The Bay Area tech driven frenzy continues to march forward with no stopping in sight. If you thought $1 million was too much for a crap shack then $1.3 million is going to be out of your price range. The tech gentrification is getting more aggressive and is pricing out people at an astonishing pace. We’ve noted the out migration of native Californians to other states is much larger than people suspect. Foreign money and high income households are the power players in these niche markets. This is simply a fact but also is tied to the bull market that has now entered into its eight year. There are now signs that we are reaching a plateau but this system only understands two states: boom and bust. There is nothing calm about the way our real estate system is now structured. It is about fast gains or big losses. All or nothing. You are either riding the big wave or crashing in fantastic fashion. People forget cycles and have the long-term memory of a gnat when it comes to these things. The Bay Area continues to drink from the cup of housing mania.