Being a landlord is no easy task. In the long run owning a rental property can be a nice addition to your investment portfolio but there is nothing sexy about it. Many small time landlords only start to see the benefits many years into holding the property. For the most part, this is why Wall Street and large hedge funds have avoided owning single family homes in their portfolios. That of course changed in 2007 when the market went into full on implosion mode and the mantra of the day was “chase yield anywhere you can find it.” There is this odd notion that somehow all the great deals went to other families that timed the market perfectly. The excellent deals of 2008 to 2011 were happening at a time when the economy was in crisis mode. Some of the best deals to be had were done via auctions and you needed to have a cashier’s check to play so many regular people had no access to this. 7 million foreclosures and many of these are now in the hands of investors. The homeownership rate is a clear indication of this. It should also be no surprise that we’ve added 7 million renting households. How big of a change have we seen? Rental income which held steady between 2000 and 2007 at roughly $200 billion per year is now up 240 percent coming in at $640 billion. Since few people actually own rentals, this is money flowing into a concentrated group.
Higher home values for the sake of higher prices is not necessarily a good thing if future generations of Americans are being priced out of the market. There seems to be this movement that simply ignores the glaring plight of many Americans regarding stagnant incomes and the reality that we have gained 7 million renting households while facing a similar number in completed foreclosures since the Great Recession hit. The system in terms of organic supply and demand was artificially stunted as foreclosures lagged and banks auctioned off swaths of properties to large investors. With this trend backing off we are now left with higher prices but most regular families being priced out. In California you have over 2.3 million adults living with other adults because of financial challenges. Housing is an illiquid asset. At any point, you can buy a share of Google or Apple stock and sell it back practically in the same day. Not so for housing. At any given point only a short supply of total housing is on the market. Currently housing is priced for investors and not your typical family. Forget about younger Americans that are saddled with large levels of student debt and have lower incomes. When it comes to housing, the kids aren’t alright.
The end of the year is here and Southern California home sales are slogging along into the final months. People have lost perspective on value but it would seem that two things have happened. People are being rational and viewing current prices as frothy so are deciding to hold back. You also have investors pulling back dramatically this year putting a dent into sales. So the argument now goes, if some willing sucker paid this amount then it surely is “worth” it. Yet most of the entry level priced homes leave much to be desired and of course, aspiring property ladder climbers only hope to stay in the first rung of the ladder for a few short years until the equity gravy train comes along. In other words, timing the market. Good old fashion speculation. Some view real estate as this super secure investment yet somehow 1,000,000 Californians lost their homes to foreclosure since the bust occurred. $10,000 in the stock market is risky but half a million for a tiny box? Safest bet on the planet thanks to all the juicy leverage! So what does the starter home look like if you are aiming at buying in Culver City?
People look at population growth in California and see nothing that stands out. Digging into the numbers you find some interesting figures. First, the main reason California is actually growing is because of international migration. California for well over a decade is losing domestic residents. That is, “domestic” Californians on a net basis are heading out of the state. On a more micro level, you are seeing the middle class either being phased out of the state or being pushed into lower priced inland regions. It is an interesting trend that is also happening in the tech hungry Bay Area. Housing continues to be an important topic because the vast majority of income is spent on housing. California has one of the highest percentage of families spending half or more of their monthly income on either rent or housing payments. In places like Los Angeles the main international migration is coming from Asia. You also see this driving up real estate values in certain areas and this contributes to domestic out migration. The migration numbers are interesting and shed light on this global trend.
The Housing Affordability Index (HAI) is once again flashing red for California. Los Angeles and Orange counties are two of the most expensive markets to rent relative to what people earn in the area. The The HAI is showing that once again, California is incredibly overpriced. Only 30 percent of families can afford the typical home in the state. I thought it would be useful to look at data showing the typical non-investor buyer in California. These are people after all, that are putting their money in the game. It should be obvious that the middle class is being priced out of the state. As we enter the last month of the year, the housing market will likely end on a rather dull note. Those that qualify to buy understand the large commitment it will take to purchase a home in the current market. Locking in at this point is no easy decision. But for many, there is no decision to make because the majority of large markets in the state are simply unaffordable. This continues to explain the large number of people living with parents deep into their 30s and even 40s but also the decline in sales volume.