If the American dream means owning a home, many younger Americans are opting out of that dream. Part of the reason may be a generational shift in having smaller families and a growing number of dual income no kid (DINK) households. That is part of it but a bigger reason is many younger Americans are financially in poor shape and unable to buy. Many are now part of a growing renter class. The recent Census data shows no reversal in this trend. Why would it? Many young Americans are also carrying high levels of student debt and in high cost areas like California, 2.3 million young adults are living at home with their parents because of financial challenges. This change has also impacted home builders since there is less of a need for large new homes when the demand is more for affordable rentals. Builders are keen to see this and that is why multi-family building permits are way up. What impact will this trend have on the housing landscape of America?
There is little arguing that Santa Monica is prime Westside real estate. Some would like to believe that somehow Pacoima, Compton, or Lawndale are somehow new prime markets but there is little dispute that Santa Monica is fairly elite when it comes to SoCal housing. I enjoy Santa Monica and given prices in the market, I’m sure many feel the same way. But for those not in the area, they might find real estate prices downright insane in this niche market of California. California has an affair with boom and bust cycles when it pertains to real estate. We’ve had a nice run and now the euphoria is wearing off. I’ve noticed though that in Santa Monica and Pasadena, I’m seeing the term “condo alternative” popping up more often. Usually the condo alternative title is used on an ultra-tiny property with an ultra-high price. Tiny flips are easier to rehab and turn around simply because of the size of the property. There is only so much you can do with a place the size of a dorm room. Let us take a look at a condo alternative in Santa Monica.
In ancient home buying times, the vast majority of home purchases came from regular families looking to buy a home. When I say buying, I mean committing to a 30 year mortgage financed by a bank. This was the traditional mechanism of keeping the real estate machinery moving. Since 2008, a large part of the buying power has come from “all cash” buyers that simply did not require a mortgage. This has been a dramatic shift in how home sales work. It is interesting to see real estate agents unhappy about this arrangement as well because volume has crumbled. Also, many of the early deals were done via REOs at banks and auctions which were largely off the market for most regular buyers unless you had the funds to purchase a large block of single family homes. So with big investors pulling back from the market, it is no surprise that regular American families simply cannot compete. One good indicator of this is to actually look at applications for mortgages. What we find is that demand for mortgages is simply not there.
There is a great book called Willpower that examines the ability of people to actually exercise self-control and how these character traits impact life. Those that can delay gratification typically end up doing better in life throughout marriages, work, and their financial decisions. Why this matters for housing especially here in California is most people look at their left and right and are trying to keep up with their neighbors. It is fascinating to see many people trying to cash in on their current equity so they can leverage up to a bigger home because they can. Forget about paying down the mortgage for retirement. Time to press reset and leverage into a bigger home. Since home ownership in California is largely in the domain of older home owners many are simply diving into this property ladder game once again. Retirement figures show that many older Americans are horribly underprepared for retirement. Yet the advice is always to buy as much house as you can get your hands on. Think about the $700,000 starter crap shack here in SoCal. For a 20 percent down payment, a household will need to save up $140,000. Most are into instant gratification and that is why car leases reign supreme in the land of all hat and no cattle. This is the land of Purnia Dog Chow eating baby boomers living in million dollar homes and welcoming back their heavily indebted offspring. The Southwest once again is paving the way to this new recent housing mania. If we look at California, Nevada, and Arizona we find that home values have quickly outpaced underlying economic activity.
While the weather is hot in Southern California, unseasonably so, the housing market has gone lukewarm. People forget that in California, housing needs to be booming or busting in epic fashion. Yet inflection points are harder to detect. People will say “well look at current prices!” Sure, let us look at them. Are you going to buy that crap shack for $700,000? Most of the justification usually revolves around other suckers paying current prices and 2013 as some kind of barometer for years to come but there is no evidence that the trend will continue. For those that enjoy looking at quality homes and I mean this in terms of construction, many have no idea what awaits them when they purchase their glorious little shipping container. And without a doubt, those buying these tiny “starter” homes are simply rubbing their hands just counting the days until they can unload with equity check in hand and start on their property ladder adventure. Some are so narrowly focused that they are missing the macro picture in the state and that is, we have largely become a state of renters. Not because people don’t want to buy, but because most families simply cannot afford to buy. Most households in L.A. County rent. What I am noticing though is quicker turnaround sales hitting the market. And these aren’t necessarily your flipper variety. These are people turning around rather quick. Take a look at these two examples in Pasadena.