Given every headline we have seen over the last few years you would think that home builders would be out in droves adding new supply to the market. What building is occurring is focused on multi-family units to cater to the trend of rental Armageddon. The new home market does well when the economy is recovering evenly and wages are moving up across the board. New home sales come with a heftier sticker price and most investors are interested in deals, not marked up new homes. But prices are pushing up in most metro areas and rents are steadily moving up. Yet this push is more of a constraint of investor demand for existing homes and not regular families competing with one another as was the case for a few generations. That is why the homeownership rate of today is what it was back in 1984, over 30 years ago. It is also the reason why new home sales are pathetically low. The new home sale market is really the place to look at for a true housing recovery for the masses and nothing is really happening there.
I remember in the 1990s friends getting unsolicited offers for “tech” jobs where the only prerequisite was a basic understanding of computers and some common knowledge of HTML. With these simple skills, you were on your way to tech millions. San Francisco was at the hub of this insane mania. Today people will argue that we now have solid companies like Google, Apple, or Facebook pumping out great jobs for great minds. But I’m also seeing money being thrown at long-shots by venture capital just to see if something sticks. The tech bubble was spurred on by the stock market mania where the public participated. This tech mania is being spurred on by elite private capital. The first housing bubble was accessible to the masses. This housing bubble is available to Wall Street investors, uber-wealthy foreigners, and outlier households with big incomes. The San Francisco median home price now reaches $1 million and the ultimate crap shacks are to found there.
People are desperately trying to find great deals on crap shacks. In California, most buyers have no clue about foundations, termites, or even basic roofing yet buy homes that are nearing 100 years in age. Issues will arise that will cost a good amount of money. It is simply part of owning a home. But the desire to “own” overpowers any common sense. In retirement it is easy to find shelter. What isn’t easy to find once you reach into old age is additional streams of income. For this reason, you have many people locked into their homes in California with little in retirement savings. These are your Wal-Mart shoppers living in homes worth close to $1 million but basically unable to leverage their lotto ticket. Plus, many have their adult kids moving back home with them thanks to rental Armageddon. Pasadena has some old homes. I mean old. Today we’ll take a look at a couple of properties that can be your next home!
L.A. is the most unaffordable housing market in the entire country. Beyond the pretense that everyone is rich and has money stashed in their backyards being guarded by Chihuahuas with cubic zirconia necklaces, most in California are living deep in debt. Those buying homes today are either investors, wealthy foreigners, or locals leveraging to the max for that wonderful crap shack. What makes the LA/OC market the most unaffordable is that wages flat out do not justify current home prices. Since LA is a majority renter county, it is important to look at dynamics in this group. One study from UCLA found that LA renters devote nearly 50 percent of their income to rent. Taco Tuesday isn’t only a baby boomer mainstay, it is a necessity to pay the rent. The disconnect only got more profound over the last two years. Housing prices in the LA/OC area went up by 28 percent while wages went up by 2 percent. Thanks to maximum leverage loans, big investor demand, and low interest rates, people can buy a $700,000 crap shack and pretend they are truly rolling deep in cash. All the data coming out is showing that many are flat out pretending and living paycheck to paycheck, even with expensive budgets.
The financial system is gearing up for providing maximum leverage to those willing to take the dive and purchase a crap shack. Low down payment loans are now making their way back into the system and the machinery of credit is flowing nicely. I’m sure many of you are in the same boat and if you happen to have decent credit (meaning no bankruptcy or foreclosure since the bar is low), then your mailbox is being flooded with credit card offers and advertisements to buy a new car or to take on another credit card. The last time volume was this high was back in 2005 and 2006. Now I’m seeing ads coming in regarding low down payment products and also interest only loans. Yet when we look at the actual details, the trend has been dramatic in leaning in favor of renting. But not because this is some trending sensation. No. Household incomes simply do not justify current prices. However, inject risky loans again and the game can go on further. We are seeing weakness in the market in the form of low sales volume. Virtually all major counties in California have seen a dramatic drop in homeownership in favor of renting. We’ll look at the county level data but also take a stroll down to Huntington Park for some real estate deals.