The cost of California housing in the form of mortgages and rents is forcing many families to pack up and leave. And many others are seriously contemplating the decision. A recent survey by the Bay Area Council found that one-third of respondents would like to leave the area sometime soon. Recently I purchased an item from an independent seller and he couldn’t help telling me how he was moving to Nevada and how SoCal prices were “insane” and he couldn’t get ahead even with a good income. Most of time you get some Taco Tuesday baby boomers yelling from their gut that “you should move then!” to most people examining high home prices in California. And guess what? Net migration out of the state is high. In terms of domestic net-migration, 63,300 more people fled the state than entered. This was the highest level since 2011. People are voting with their wallets.
We have now gone full circle when it comes to California real estate. The San Francisco housing market is blistering hot with all common sense being flushed down the Twitter tubes. While the idea of “tiny houses” seems like a new thing, this already happened over 100 years ago although by a force more powerful than the financial market. After the 1906 earthquake and fire people sought shelter in tented communities and city parks. Of course this was not a long-term solution so union carpenters in combination with the San Francisco Relief Corp., San Francisco Parks Commission, and the U.S. Army got busy on building the original earthquake shack. These tiny cottages were built quickly and fast. These places simply provided a roof over the heads of families after the devastation of the quake. Today, they are being sold to future tech hipsters and investors for ridiculous prices. The earthquake shack mania is now here!
Real estate inventory is extremely low in this current market. This has allowed the market to put upward pressure on prices even though sales volume is low. The idea of real estate correcting has once again been washed away from the cultural psychology. Home prices, the media, and house horny shoppers have once again turned real estate into a no lose proposition. Seems to make sense when you look at current home prices. But then you look at the crap shacks you can buy and realize you are on the hook for 30 years with a heavy mortgage around your neck. When markets get feverish you start seeing flowery language on listings on otherwise crappy properties. $700,000 shacks that would sell for $20,000 in Detroit. It is one thing to purchase a nice home for a hefty price but to be convinced that you have to buy a beat up fixer upper for a ridiculous price is a symptom of a distorted market. All you need to do is look at current market inventory.
There seems to be a heavy rush into everything real estate. This is to be expected in a low interest rate environment where the market is encouraging dramatic credit borrowing. According to the Case Shiller Index US real estate values are up 28 percent since 2010. That is a solid increase especially when income growth has been anemic to non-existent for many household groups. The housing market tends to garner most of the attention because that is what the lemmings in the media enjoy digesting (plus you make good money selling ad space for refrigerators, stoves, and all the other crap you fill your house with). Yet the commercial real estate market rarely gets any sort of attention. It is hard to believe that based on a couple of commercial real estate trackers, commercial real estate is even more inflated than residential housing. In a widely tracked index, according to the Moody’s/REAL CPPI index commercial real estate values are up by close to 100 percent only since 2010.
The topic of young adults living at home is critical to the housing market since it will impact future home building, renting, buying, and purchasing behavior for the foreseeable future. It is interesting that Trump being the de facto candidate for one of our major parties is basically a real estate marketer/developer that pitches real estate that is “too great” for most Americans. On the other end, we have Sanders who is essentially the direct opposite of Trump (i.e., free college tuition, break up the banks, etc). The billionaire and the non-billionaire – interesting. At this point, you have 3 candidates left standing and in many households, this divide is playing out. You have Taco Tuesday baby boomers that essentially were fortunate to buy at a time when the housing playing field was easy. I even see this in neighborhoods I’m familiar with. These are people that bought and many don’t even have college degrees. In virtually every case, many would not be able to buy in their own hood today even if they took a time machine and came back with their similar educational training and inflation adjusted income to today’s hyper competitive arena. When a home goes for sale, it is bought by investors or by two working professionals (most common I have seen are tech couples made up of engineers and programmers). Parents may gripe but now many have their Millennial kids living at home. If it feels like a common trend it should be because this is now the most common living arraignment for young Americans.