There has been a strong growth in renting households over the last five year. Even home builder optimism and permits are perking up but a large push is coming from builders putting up multi-unit properties. In other words, rentals. For most Americans with a positive net worth, most of it is tied up in their real estate equity. Consider a home a forced savings account (you have to sell to unlock that equity). But as the low interest rate environment swept the nation, big banks and investors decided to try their luck in being landlords. After all, you just had 10 million people lose their homes to foreclosure and they will need to live somewhere. Like a simple math equation, we’ve also gained 10 million renter households in the last decade. Yet this trend is continuing even in the face of our six-year recovery. You are seeing in China how quickly psychology can turn. The real estate market in China has slowed down considerably so people were plowing money into the stock market where valuations were ridiculous. The market in China has lost close to $3 trillion in market cap recently. So much for prices only go up. And of course if this is more than a tiny trend and a real correction, some of the hot money from Asia may start slowing down as when the Nikkei imploded. These are outside forces and for most Americans, renting is becoming the economic choice.
One new argument I’m seeing is that over the last decade, 10 million Americans lost their homes through the foreclosure process and given the timing, their credit records are now absolved and they are itching to get out and buy. Unfortunately, most will rely on fixed rate products and the ability to leverage up is preventing them from buying and pushing them into rental Armageddon. Of course those that sell homes see this as a potential bonanza of potential clients. But what are you going to sell? Although inventory is picking up, competition is still fierce and many of these households lost their homes because they were levered up to high. They are in the market for affordable homes which currently, there are very few. The logic goes that since lenders are checking incomes and these loans are fixed, everything is perfectly fine. Yet we are in a big bull run for the stock market and trends do change. In California, housing is incredibly unaffordable to most families. Is there something to be said about those 10 million foreclosed families?
Real estate markets are notoriously slow when it comes to shifting momentum. While stock markets can react like a fighter jet real estate markets are more like turning around a cruise ship. They react slowly and once momentum shifts, it is hard to change course. Following previous bubbles, the turning point has always included a rise in inventory and a sudden slowdown in price appreciation. These usually go hand and hand because Taco Tuesday loving home prices usually shock some buyers and little by little inventory starts to build up as new buyers are reluctant to settle into a $700,000 crap shack with years of deferred maintenance. For the first time in many years, we are seeing a big jump in inventory in some markets. I’ve noticed a big change in inventory for Orange County and the Inland Empire. Los Angeles is seeing inventory pickup but at a slower pace. Ventura is up slightly and San Diego is virtually unchanged. Let us look at the current inventory figures.
At the start of the year, discussing a year-over-year drop in California home prices seemed unrealistic. You can only defy gravity for so long and home prices for California are virtually unchanged year-over-year. The current median home price in the state is $396,750 up only 0.4 percent from last year and down 1.8 percent from the previous month. Sales are still low thanks to prices and the lack of inventory. California has seen a dramatic addition of rental households thanks to the current trend. The big question now with momentum tilting is where will it take home prices? California tends to do things in a big way with real estate since we perpetually go into a boom and bust cycle. Now with prices hitting a snag and inventory coming back you have to see how the media cycle is going to play into this. People are now used to prices moving up so quickly as if this was some law of nature. Los Angeles County is seeing normal inventory returning while Orange County is seeing a big jump in inventory. Let us take a look at the numbers.
Foreign buyers are a big part of the US real estate game. I’m surprised that some people downplay this because on aggregate, foreign purchases of US real estate do make up a small portion of total sales. Yet foreign money is very targeted on certain areas. For example, Canadians love buying up Arizona real estate and prices must seem free when compared to the gigantic housing bubble Canada is going through. It should come as no surprise to you that the top international buyer of US real estate is now China. It should also be no surprise that Chinese buyers really enjoy buying in California. Are they buying in droves in Highland Park or other hipster areas? No. But look at places like San Marino and you will see giant pools of money flowing in. The National Association of Realtors (NAR) released a detailed report on foreign buying. I think it is worth examining closely.