What a difference a decade can make. Over the last two decades the number of U.S. households has grown by 25 percent. But the growth has come in two distinctive waves. Between 1995 and 2005 nearly all of this growth came in the form of new homeowners. However, the subsequent decade saw something very different. Most of household growth between 2005 and 2015 has come in the form of renter households. It should come as no surprise that new home buying still remains weak. With this new trend unfolding, it shouldn’t come as a shock that multi-unit permits are surging as builders place their bets on rental Armageddon. While a few people can’t wait to dive into mega debt for a crap shack, others are simply renting either out of necessity or by choice. In fact, renting over the last decade has been the choice many have made (out of necessity or free will) contrary to the crap shack enthusiasts trying to talk up their poorly built piece of junk as some kind of diamond in the rough. Builders with deep pockets are betting on a continuation of the rental trend. It should also be no surprise that this decade saw a major surge of the “single family home” as rental unit.
San Francisco real estate has entered into terminal velocity madness. The median home price just reached $1.35 million. This is an increase of 103% from the first quarter of 2012. The NASDAQ itself is up 85% over this period and of course the hot money from the stock market is flowing directly into San Francisco real estate. The incredibly hot tech market has created ridiculous valuations on companies without any real profit. Ideas like delivering a $1 taco to your house for $20 via an app is all the rage. The ultimate goal for many startup companies is similar to what people are doing with real estate – hope the party goes long enough where you can sell-out and find another last sucker to hold the bag. With the wild run in the stock market valuations are out of control. Young wealthy tech workers at the upper-end of the spectrum are funneling money into a small number of houses. But you will be surprised at what $1 million will buy you in San Francisco. Having prices double from an already high point in 3 years is simply insanity. San Francisco housing is looking extremely frothy and now with a correction in the stock market, we will see if real estate follows its typical lagging pattern.
Venice has an interesting vibe for a California beach city. It certainly doesn’t carry the glamour of Malibu but you wouldn’t get that from looking at the price here. Venice is undergoing full speed gentrification. We are seeing shoeboxes selling for more than one million dollars. The lemmings are lining up to make purchases just when the market is reaching a short-term peak. In California we only know two speeds: boom and bust. We’ve had a nice boom recently. All you need to do is look at the history of what is going on and you will understand this is unsustainable. It seems with every gyration in market volatility, we go from yes an interest rate is going to happen to full on retreat. If you haven’t suspected, the Fed is running a confidence game at this point. Buyers are diving in with maximum leverage trying to get a piece of the housing action. Yet real estate is trailing the stock market and the market is losing some steam. Venice highlights all the craziness that is SoCal housing.
It is well documented that the middle class of California has been migrating out of the state for well over a decade. A large part of the population growth is coming from births and foreign migration. Foreign buying of real estate has accelerated in the last decade and has helped to push prices up in many California cities. Many owners are enjoying the large gains in equity if they sell. You don’t get to enjoy that equity until you close escrow and some Californians are cashing in those lottery tickets and heading out to more affordable places. In some areas this is causing prices to increase. During the last bubble California was a big player in inflating Nevada and Arizona real estate as people were buying second homes and investment properties. This time, you are seeing people buying for long-term purposes of relocation. Not everyone is thrilled about this trend especially local families in said markets that now find themselves priced out. All this does is makes the renterfication of the country more pronounced. In Portland people are becoming active and placing anti-California stickers on real estate signs.
Historically low interest rates and artificially low inventory has helped to boost home prices but the homeownership rate is in perpetual decline it would seem. There is a tendency to forget that the rise in home values was largely driven by uncharacteristic investor demand for many years. This multi-year buying has resulted in many homes being taken off the market only to be turned into rental units. The numbers are staggering but they are worth repeating: we have added 10 million renter households over the last decade while being neutral on actual homeowner households. The math is derived from the grim reality that since the crisis unfolded we have witnessed 7 million Americans undergo the process of foreclosure. This flies in the face of the constant drum beating that somehow buying a house is a sure bet. With most things financial, you have this survivorship bias where those that got smoked out of the market are silent while those that got lucky or timed the market correctly constantly voice their perspective. Yet things are good until they are not.