Investor buying continues to be a major player in the current housing market. Over the last two weeks I’ve had the chance to drive down neighborhoods were international money is flooding in. It does give off reminders of when Japanese buyers were purchasing tons of California and Hawaiian real estate. When it comes to California, there are certain cities where international money is pouring in. This matters when sales margins are razor thin. What struck me about these areas is the marketing is heavily geared towards international buying. After all, when escrow closes there is no loyalty where the cash is coming from. California continues to draw heavy investor money from China alongside their massive boom over the last decade. Apparently buying tons of consumer goods eventually will have a bigger impact and we are simply seeing money repatriating back to other places. While the US is seeing some signs of housing mania, we are nothing compared to the nutty Canadian housing market and what is occurring in some major Chinese cities. Yet a big part of this is speculation and we actually see this via rents. Rentals are more reflective of what local families can pay. It is interesting to see in some highly desirable areas that rents go for $2,500 to $2,700 while homes are selling for $700,000 to $750,000. Foreign money is a big player in the current market and this is also very dependent on foreign economies sustaining their booms.
As we dig deeper into the summer selling season it is becoming more apparent that this summer is going to be a dud for Southern California. From Compton and Inglewoodto San Marino and Arcadia the insanity has reached another apex. Inventory is growing, price gains are stalling out, and sales volume has certainly fallen. Aspirations are certainly different from what your budget can afford. Whenever I see comments about “people are always willing to buy” I tend to agree. People are willing to buy a $700,000 McMansion while making minimum wage as we witnessed in the last housing bubble. Give buyers enough credit and they’ll go hog wild. When it comes to housing, #YoLo seems to be the motto. The will to own a home will make people do some seriously ridiculous decisions. Need we remind you that 7,000,000 people rolled the housing dice and actually lost their homes via foreclosure just in the last decade? You don’t get any cable airtime for “This Failed Flip” or “Stretching our Budget for a Crap Shack.” Who would you get as a sponsor? Maybe Fancy Feast for the baby boomers lounging in their granite countertop gold plated sarcophagus. The housing market is turning in SoCal yet again. But real estate cycles turn with the speed of a sloth. Will we see a minor correction or something bigger?
If you really want to see the impact of cash buyers pulling out of a market look no further than Las Vegas. Las Vegas was the poster child of real estate mania and many California home owners contributed to the previous boom by tapping out equity and purchasing properties for flips or for the occasional gambling trip down the I-15. The latest boom is being driven by large Wall Street cash and lusting investors coveting “cheap” properties. That boom appears to be turning. A recent report from Zillow shows that inventory in Las Vegas has jumped up a whopping 51 percent year-over-year. At the same time, you see cash buyers pulling back from the market. Back in May of 2013 roughly 60 percent of all purchases went to the “all cash” category while this year it is closer to 40 percent. So it should come as no surprise that home sales are now down by 22 percent year-over-year during the hot summer selling season. What does the future hold for Las Vegas real estate?
SoCal housing is a blender of crazy aspirations, delusional thinking, poor quality building, and a market built around incredible hype. A boom and bust machine. When we show homes in San Marino, Pasadena, and Arcadia people begin to realize what they are up against. The argument to buy seems to revolve around the “values will only go up” regardless of your specific ability to pay. Opportunity cost is rarely factored into the equation as if real estate was the only investment out there. There is a flood of big money coming in and this is somehow reason enough to push you into a property that will stretch your family’s budget into a position of crying out for mercy. A few people have e-mailed me with their actual budgets and I find it near comical that some people think that they somehow can afford to buy in Newport Coast, Beverly Hills, or Manhattan Beach with the incomes that I’m seeing. They are shopping with a Burger King budget and expect to somehow buy a very expensive sushi dinner. Instead of telling people that they are lusting at homes like a hormonal teenager, I will give you two cities in L.A. County where the “dream” of homeownership is very doable. It is also a useful example of how the housing mania has filtered into Real Homes of Genius territory.
The housing wealth effect is in full motion. There are many people in the market that see the rise in home equity and are now out buying bigger ticket items and also, upgrading their homes. You also have the flipper brigade being cheered on by house lusting cable television watchers. The Kardashians for the teens, the flipping shows for the Taco Tuesday adults. In California, a large group of “professionals” in the industry are disconnected from what it takes to build a quality home. Most have no sense of value and this is evident by the 1 or barely 2 toilet homes selling for ridiculous prices. On Main Street most people are brainwashed into now thinking real estate is a no brainer. You can only win, says the guy with veneers and pinstripe suit. The bread and circus is out in full fashion. Granite countertops, hardwood floors, and recessed lighting bamboozles the public from actually looking deeper into the bones of a property. If you look beyond all of this noise, the regular buyer is being screwed. Many can’t compete and are leaving the state. We have 2.3 million adults living at home with parents because they financially can’t even afford a rental let alone a home to purchase. A good portion of these folks are the BMW, latte drinking, iPhone crazed, and weekend partiers that want the L.A. nightlife but return after their escapades conclude to their parent’s home. Although inventory has risen this year and the mania has slowed down, the fever is still hot. For California’s shrinking middle class, you are seeing a state with a small section of growing affluence and a larger section of those struggling to hold on.