When investors look at markets they factor in a multitude of variables. Large investors were looking at capitalization rates and also local economies when buying rental property. For the first time in US history did we have a nationwide effort by large investors to buy up single family homes. This of course has caused a big dip in overall available inventory but has also pushed many home builders to focus on what the market was demanding which turned out to be more rental housing. The Los Angeles metro area (which includes the OC) has some of the weakest value for rental investors. This for a region where the majority of households rent. For example, the entire LA metro area has 19.7k homes for sale with a population of 13 million. Compare this to the D.C. metro with 19.2k homes for sale but with a population of 5.6 million. This is why you see some zany behavior when it comes to buying. But how do things look for the largest metro areas in the rest of the US?
When people think of gentrification, they normally think of tiny sections within a city. But what we are seeing today is global gentrification. For example, in Orange County, the most expensive county in Southern California many people have been pushed into the Inland Empire. Yet the actual employment boom is happening in LA and OC making millions of people commute ungodly hours on the jam packed soul crushing freeways. The Orange Curtain highlights a subtle massive gentrification of an entire county. You have Orange County with a median home price of $710,000 and just a few miles inward you have Riverside County with a median home price of $330,000. The fastest growing counties in SoCal are with Riverside and San Bernardino. In the end, how much is a commute worth though?
One of the typical lines lobbied by cane wielding house humpers is that renters are low income households that simply have no choice but to rent. The implication is subtle on some fronts but others choose to use a 4×4 of clarity by saying renters are simply poor people. Clearly these Taco Tuesday Jimmy Buffet loving fans have failed to take a look at rental rates in San Francisco. They also use an outdated model of the world where Don Draper was the model of success puffing away long and hard on that cigarette. Even in “prime” neighborhoods I am surprised at the lack of tech knowledge by some of these people living in million dollar homes. Some folks just have a hard time seeing that they bought a lucky scratcher at the right time. In fact, new data shows a rise in wealthy renter households. And in places like San Francisco, there are actually more households making over $150,000 per year that choose to rent than own. Clearly a household that is pulling in $150,000 or more a year is not “dumb” or low income.
One thing you can bet on is the unexpected. The big bet was that nearly a decade after the housing bubble peaked and then imploded, that young buyers would suddenly enter the real estate market in force. Instead, many are living with parents or are part of the renting revolution. Of course the housing cheerleaders continue to champion a bubble in real estate yet somehow scratch their heads at the political ramifications that are hitting our country. Just like in politics, we are living in a massively divided real estate market. The difference in real estate however is the group of people that can afford current home prices grows smaller and smaller. Millennials, the next wave of supposed buyers never materialized. What you had is low inventory, investors, artificially low interest rates, and foreign buying taking up the slack. Even in California, we have 2.3 million young adults living at home with their parents. The latest data shows that instead of taking on mortgage debt, Millennials are racking up large amounts of student debt.
With a new administration coming into office in 2017, it might be useful to examine what potential policies will be enacted that may have an impact on housing. The market responded to the election results as if it were a Black Swan event. Most of the comments preceding the election almost assumed it was a foregone conclusion that Hillary Clinton was going to be the next President. Clearly that was not the case. The bond markets had an immediate sizable reaction. We still don’t have the full details on how things will change but there are some changes planned that may have an impact on housing. It is hard to see how rental Armageddon changes because of this. The overall challenges for housing will continue to persist and the Taco Tuesday crowd will continue to imagine that any move is good for housing. So what does a Trump administration mean for housing?