High housing costs have put extreme financial strain on working families in Los Angeles County. There has been a rental revolution over the last few years causing rents to increase. Despite the idea that this is being driven by income, this is merely being pushed by limited housing options. Income has been stagnant for many years. Since the crash, housing values have been pushed up by investors, flippers, and foreign buyers. Starting in 2015, the economy slowed down and housing hit a wall. 2016 is off to a poor start. What few realize is that many in L.A. County are living in densely packed areas through options like: living with parents, roommates, converted rooms, and pseudo-housing like garages. We can label converted rooms as “informal housing” and in Los Angeles we have over 200,000 people living in these units. In fact, parts of Los Angeles have population densities that beat out Queens, The Bronx, and Brooklyn. And you wonder why street parking sucks.
It is very telling to see how people are reacting to what has been a minor correction in the stock market. People have a hard time figuring out what they will do when things move down. We’ve had a great run in both stock values and real estate prices thanks to investors and hot money. This doesn’t do much for the cash strapped household that is now largely opting to rent. People do realize that renting is an option right? The crap shack peddlers seem to think that everyone is just itching to buy a $700,000 crap shack. Surveys of Millennials, the next group in line to buy houses in mass is largely reflecting a cooler attitude towards real estate. In most cases this attitude stems from the inability to afford a home. Keep in mind the homeownership rate has been trending lower for some time now and this is on the back of a raging bull market. What happens to housing if we have a correction in the stock market?
There is a major environmental disaster happening in the Los Angeles County suburb of Porter Ranch. You wouldn’t know it from delusional house humping cheerleaders that seem to think that nothing can happen in SoCal that would diminish the value of real estate. In fact, there are already lawsuits being put out regarding trying to keep home values inflated (forget about the health impact this disaster is having on local residents in freaking L.A. County!). This gas leak is major. Governor Jerry Brown just declared a state of emergency but this is a late notice for something that has been going on for some time. Many local residents have been evacuated and this is a bigger story than is being reported.
The California housing market ended 2015 just like the stock market. Losing momentum and looking overpriced. In California a runoff of tech wealth has flooded into areas like San Francisco driving prices into the stratosphere. People now seem to feel that real estate is untouchable and that the Fed somehow cares about some crap shack in SoCal. The Fed has bigger fish to fry. Foreign money has pushed prices up in certain cities but this money can be fickle. Will this money continue to flow in? The housing market in California looks due for a correction simply based on underlying fundamentals. Most of the arguments for prices remaining high across the region seem myopically focused on the notion that foreigners and investors are somehow dumb when valuing assets. I’ve spoken with a handful of investors, both local and from abroad and they are keenly focused on value. There are a few challenges facing the California housing market and it is safe to say that things will limp along into 2016.
There is no doubt that San Francisco is in a deep housing mania. When you take a look at the junk you can buy with $1 million you realize something is amiss. Bubbles are hard to assess when you are in them. You have continuing momentum pushing prices higher and the constant rhetoric that “this time is different” although history tends to serve as a better guide. But San Francisco is in another dimension. The median home price is now $1.25 million and the typical condo is selling for $1.1 million. You have tech professionals earning good money struggling to afford basic rundown rentals. All of this is being spurred by hot money in the tech sector and foreign money flooding the market. In a place like San Francisco even a professional couple with a solid down payment will have a tough time competing with all cash offers over asking price. As we noted, last month we saw a large portion of the market being taken over by all cash offers yet again as regular buyers are priced out. San Francisco is now more unaffordable than at the peak of the last bubble.