You would think that the recent rise in home prices across Southern California would be enough to bring most homeowners into a positive equity position. However, we still have 1 out of 10 homeowners in a negative equity position. The total number of homes underwater in SoCal is estimated to be at 288,000 according to CoreLogic. This is a far cry from the 1.1 million underwater homes going back to 2009. Since that time many foreclosures have occurred and many homes have now shifted into the hands of investors. 288,000 is a large number of homes especially in a market with limited inventory. Now that we are entering into the slower fall selling season, you will likely see inventory pullback and buying demand slow down. Investor demand has pulled back dramatically already. Buying a home is a big deal and running the numbers on a crap shack is important in making sure you are seeing the bigger picture. There still seems to be this amnesia as to what happened only a few years ago. Millions of homeowners lost out in the supposedly safe investment vehicle of housing. Why? Because they took on too much debt and paid too much for a property. As prices soared in the last year, we are starting to see a deeper questioning of current values now that investors are pulling back and foreclosure resales make up a small portion of the market. Regular buyers did not push this market up. It was investors. Many regular households have been pushed into renting.
You can smell the end of the summer real estate season as some drunk sellers are pulling properties off the market since they are unable to obtain their ridiculous prices. Funny how expectations work. Some sellers drink the Kool-Aid and suddenly think their home is worth some optimistic appraisal or what a manic market will pay. You even see this in the real estate ads where sellers try to throw in their best curveball on what otherwise is a glorified closet. But hey, prices will only go up so buy with all the confidence in the world and never mind the carrying costs, opportunity costs, or other factors that make buying a more intricate process. The fall housing market always slows down. Now, with foreclosures making a smaller portion of sales, we should expect to see a bit more seasonal changes. However, I just love seeing some of the old neighborhoods where old properties are being sold as if they were newly built quality homes. We are seeing this in places like Pasadena for example. Let us go shopping in Santa Monica and see what we can get with $900,000.
There was much celebration regarding the jump in private housing starts. However, once you begin to look beyond the headlines you realize that the big jump came largely because of multi-family starts. In other words, building more rentals in the form of apartments for a growing population that rents. Private starts for places with 5 units or more has now hit a post recession high. This makes sense given the fall in rental vacancy rates and the rise in rental prices. Yet what we find is that more income is being siphoned off into a less productive sector of our economy. Real estate tends to be a big plus for an economy when it happens organically with rising incomes, good overall employment prospects, and first time buyers leading the charge. Today it is more of a shifting of assets into fewer hands while extracting more income from the productive sectors of the economy. Not everyone can have their flipping show on cable television. For example, over 11 million Americans now pay 50 percent or more of their income to rent. Many of those people are here in California. The trend to building rentals aligns with the underlying reality that many future Americans will be less affluent compared to their parents.
Southern California is truly a unique place. Once the family planning part of life takes place, people go into house lusting mode overdrive. The Viagra of house hunting is all those remodeling and house flipping shows. I’m sure many of you saw a recent study that showed the cost of raising one child to be somewhere close to $250,000. This is important because many people are paying sky-high housing costs to own a home in areas with crappy or mediocre schools. They will need to send their kids to private school if they want to provide them an education that a $700,000 crap shack would entail. Maybe they’ll take a class on economic history and how following the herd is rarely a sound foundation. Also, with the cost of attending college setting new records, what will it cost when those young kids of today go to college in 17 or 18 years? They rarely factor in these future costs when they purchase a home. Why think about that when squeezing every last nickel into a mortgage payment is the dream of many SoCal residents? Screw retirement planning or focusing on the true cost of raising a family, the ultimate goal is own that prime location home. You better make sure you have extra room for when those kids boomerang back onto your Taco Tuesdays and Karaoke Fridays. Set a nice seat and plate for the Fancy Feast weekends. Let us go shopping for some homes in Culver City!
Household formation is an important indicator of future housing demand. One of the big reasons why home builders have been tepid about building homes in the face of a growing population and rising prices is that first time home buyers are a small portion of the housing market. The reality is, you need household formation to justify bigger developments instead of investors looking for deals to flip or rent out. Home builders have been busy building multi-family units but these are clearly slated for rentals (the number of growing renting households would justify this). The odd dynamics in the current market have forced millions to live at home. In California 2.3 million adults live at home because of financial reasons, not because it is the new hip thing to do. In San Francisco, even well paid tech workers double or even triple up in apartments or homes to make the high rent affordable. What is probably more troubling in the data is that this trend is holding steady across the nation. Quality employment growth absolutely matters in the face of household formation. In the past, a boom in employment led to natural demand for housing. Today, you would have some believe that juiced up real estate and investor lust is somehow going to be the drawing force that lures cash strapped young buyers into the market. So far, those figures are not materializing.