California’s housing market is a boom and bust machine tuned to attract the masses. Timing matters in a state where speculation is rampant. Since 2005 California home owners have received over 2,000,000+ foreclosure notices. Of course this goes into the graveyard of foreclosure information that we seem to forget each time the market booms. Since 2000 with shady mortgages, Wall Street financial shenanigans, and the Fed’s low rate policy the housing market in California has only entered into a more pronounced boom and bust carousal. People go into a deep herd mentality that fails to acknowledge even recent history. If you timed the market say two years ago and went with the record low rates at the time plus lower prices, then does that mean prices today are too high at 20 to 30 percent increases with interest rates 100bps higher? That $500,000 home probably worked at low rates but what about it at $650,000 with higher prices? Incomes certainly did not keep pace. Investors are still buying roughly 30 percent of inventory. This group is also slowly pulling back and it should be no surprise that inventory is rising and prices are actually stalling out. Since 2000, the California housing market is a wild ride of speculation. Buying and selling is a matter of timing, luck, and larger macro forces at work. We acknowledge this and for most, buying or selling is a decision that needs to be made in real-time. Is it a good time or bad time to buy today based on my specific factors? Yet let those 2,000,000+ home owners who got a taste of the foreclosure process serve as a warning that not all purchases are golden in the Golden State.
Existing home sales continue to operate in an anemic range. The latest existing home sales figures show that sales volume is back to where it was in July of 2012. A large part of this is due to higher interest rates, investors crowding out regular buyers, and prices outpacing stagnant incomes. It is surprising that somehow people believe that prices can simply go up untethered to actual incomes especially in an environment that looks to have higher future interest rates. When we look at futures data the market is now pricing in a 100bps move in interest rates higher over the next year. The so-called traditional buyer has been a weak participant. The investor crowd is already showing signs of exhaustion and this may be a problem given that they are purchasing roughly 30 percent of all existing inventory in the market. The traditional buyer is tapped out. Mortgage gimmicks to hide stagnant incomes can only go so far. The drop in existing home sales is a reflection of shifting investor demand, stretched household budgets, and low inventory because of banking policy implemented after the Great Housing Crash of 2007. Will we see traditional home buyers again as the bread and butter of the housing market?
Baby boomers are one of the largest home owners in California. They are also the largest mortgage holders since Californians love using their properties as a virtual ATM. As time is moving by we are seeing a clash of generations when it comes to buying a home. The days of working at one company for 30 or more years is really a relic of the baby boomer past. Many baby boomers are also seeing their offspring coming back home with student loan debt that already rivals that of a mortgage in other parts of the country. Yet in many cases, their kids are happy and well rounded. I know many offspring of baby boomers and many have no intention of buying. They place a higher value on location, mobility, and having free cash to travel with close friends. The data also shows that the family unit is becoming much smaller and many are opting to have one or no kids. Why the need for a 3/2 then? This isn’t the 1960s where bigger households were common and one income was enough to live a middle class lifestyle. Yet some boomers are trying to assist their kids in buying their first home and in expensive areas, the passing of wealth is occurring in ways that may not be typical.
Existing home sales had another weak month and the blame continues to be on the notorious polar vortex. On the other hand, California is in a record drought and we are in an endless summer yet sales have hit multi-year lows as well. Could it be that over paying for a pre-World War II house is not exactly fitting in the budget of the regular local buyer? It is one thing to speculate but another to see what is happening on the ground. The granddaddy of rental investors, Blackstone has tapered off its investment buying binge dropping in acquisition volume by 70 percent from their record highs from last year. These are folks that run the numbers in bulk. I speak to many local investors and many have not purchased properties in SoCal since early 2013 since the numbers simply did not make sense then and they certainly do not make sense now for cash flow opportunities. The rest of investors are the late comers and the speculators, otherwise known as flippers. It is interesting to see the mindset shift once again similar to 2006 when the volume was turned up so high that even uttering the words “correction” labeled one as a “doomer” or some other attack not based on numbers. Unless you see real estate going up forever, you are basically camping out in a nuclear war shelter counting your stockpile until the end of days. Yet numbers matter. In many states and in certain markets, prices do make sense and have room to grow. Not so much in California at least in the short-term. This is why as we mentioned a site dedicated to housing data Zillow has reached 70,000,000 unique readers a month. Apparently “setting it and forgetting it” does not apply to housing. Let us run the numbers assuming you were looking for cash flow properties in Arizona and California.
The latest sales figures for Southern California show a market with very little action contrary to all the positive news regarding real estate prices. The latest data for February sales shows the weakest February on record only second to February 2008 when the market was fully imploding. To put this into context, we had 22,484 sales in February of 2002 and 23,004 sales in February of 2004. Last month we had 14,027 sales (a drop of 38 percent from the peak reached in 2004). This also helps to explain why some in the industry, including real estate agents are not all too pleased with this high priced market but with very little churn. Of course the higher prices are coming because of the low amount of inventory and banking manipulation. Capitulation is high and some have jumped in head first into the shark tank and ignoring financial shenanigans by saying “hey, if you can’t beat them, join them!” Initially there were some that were forecasting a flood of homes on the market thanks to baby boomers selling to downsize. As we have mentioned, there is no indication of mass downsizing and many would rather lock down in their zip code instead of cashing in on their golden sarcophagus lottery ticket. 90210 and Purina Puppy Chow? Dog food is easier to digest when living in a prime zip code. Those that proclaim that somehow everything is fine fail to account for the fact that sales volume is abysmally low. Affordability is horrific. Even when we look at mortgage figures we find that many are simply stretching to buy.
You can’t stop the internet when it comes to real estate data. Zillow is a great example of technology revolutionizing the way people view real estate. Some of you are old enough to remember when the closely guarded MLS was only accessible by your local real estate agent. Unless you were ready to do some digging, finding out what a home sold for took a bit of time. It was also hard to view a list of available homes for sale. That is no longer the case. When Zillow initially came out the housing bubble was still raging. My initial thought was that access to information would only serve to create bigger booms and deeper busts. Keep in mind that the entire housing system is still built upon the appraisal system. Basically each home is only as good as the last few sales. When a market is booming and people are now able to see the boom in real time the temptation to buy can ramp up. When the boom bursts as it did in 2008, you can also see how quickly things will reverse. Things are already slowing down and sales are dropping dramatically in some areas. Does access to data liberate us from the old model of buying and selling real estate?