California housing affordability may seem like an oxymoron. Many younger buyers are priced out in many markets across the state. The latest data from the California Association of Realtors (CAR) finds that still only 1 out of 3 families can actually afford to buy a home in the state in which they live. We also have a record number of young potential buyers (more likely potential renters) living at home with their parents. Starting in 2008 a large portion of housing sales started going to investors. These investors may have different timelines on when they will release property out into the market. In fact, this might be another big reason as to why so little inventory is out in the market. Some investors are looking to securitize cash flows and may be limited in terms of selling. Instead a regular buyer potentially looking to capitalize on equity and move up in more traditional times, you have different motivating factors. Since 2008 over 30 percent of all California home sales went to this group. Another group is baby boomers locked into their golden sarcophagus. This group from what I have found for the most part is house rich and cash poor. The notion that many will sell and cash in their lottery ticket is simply not happening in the market. Many are seeing kids move back home, many still have a desire to keep their place (even if it means living in an area gentrified by dual high income households/investors), and finally a large growing rental base. In essence the continuation of California becoming more feudal is still very much intact.
Inventory is finally starting to show up in the California housing market. The main motivator of this growing inventory is the delusional prices being asked by sellers are no longer generating massive amounts of sales from house lusting buyers. In other words, sky high prices have caused many homes to sit on the market longer thus allowing for more inventory to accumulate like a queue forming at a Disneyland ride. Can’t blame the sellers if suckers are lining up to hand over their cash for a mortgage albatross. The rapid increase in prices uncoupled from wages has left many California household unable to afford current prices. House lusting Californians are either hot or cold on real estate. Rarely are emotions in the middle in this manic state. The market has been sizzling for the last few years mostly because of speculators and Wall Street hot money flowing into the market. Sales volumes are incredibly low thus reflecting a distorted market. Those lusting for houses will simply dive in regardless of larger macro-economic trends and are largely chasing past gains as a predictor of future trends. It is no surprise that inventory is rising and prices are stalling out. Those “all cash” sales still remain a big part of the market.
California’s housing market is a boom and bust machine tuned to attract the masses. Timing matters in a state where speculation is rampant. Since 2005 California home owners have received over 2,000,000+ foreclosure notices. Of course this goes into the graveyard of foreclosure information that we seem to forget each time the market booms. Since 2000 with shady mortgages, Wall Street financial shenanigans, and the Fed’s low rate policy the housing market in California has only entered into a more pronounced boom and bust carousal. People go into a deep herd mentality that fails to acknowledge even recent history. If you timed the market say two years ago and went with the record low rates at the time plus lower prices, then does that mean prices today are too high at 20 to 30 percent increases with interest rates 100bps higher? That $500,000 home probably worked at low rates but what about it at $650,000 with higher prices? Incomes certainly did not keep pace. Investors are still buying roughly 30 percent of inventory. This group is also slowly pulling back and it should be no surprise that inventory is rising and prices are actually stalling out. Since 2000, the California housing market is a wild ride of speculation. Buying and selling is a matter of timing, luck, and larger macro forces at work. We acknowledge this and for most, buying or selling is a decision that needs to be made in real-time. Is it a good time or bad time to buy today based on my specific factors? Yet let those 2,000,000+ home owners who got a taste of the foreclosure process serve as a warning that not all purchases are golden in the Golden State.
Existing home sales continue to operate in an anemic range. The latest existing home sales figures show that sales volume is back to where it was in July of 2012. A large part of this is due to higher interest rates, investors crowding out regular buyers, and prices outpacing stagnant incomes. It is surprising that somehow people believe that prices can simply go up untethered to actual incomes especially in an environment that looks to have higher future interest rates. When we look at futures data the market is now pricing in a 100bps move in interest rates higher over the next year. The so-called traditional buyer has been a weak participant. The investor crowd is already showing signs of exhaustion and this may be a problem given that they are purchasing roughly 30 percent of all existing inventory in the market. The traditional buyer is tapped out. Mortgage gimmicks to hide stagnant incomes can only go so far. The drop in existing home sales is a reflection of shifting investor demand, stretched household budgets, and low inventory because of banking policy implemented after the Great Housing Crash of 2007. Will we see traditional home buyers again as the bread and butter of the housing market?
Baby boomers are one of the largest home owners in California. They are also the largest mortgage holders since Californians love using their properties as a virtual ATM. As time is moving by we are seeing a clash of generations when it comes to buying a home. The days of working at one company for 30 or more years is really a relic of the baby boomer past. Many baby boomers are also seeing their offspring coming back home with student loan debt that already rivals that of a mortgage in other parts of the country. Yet in many cases, their kids are happy and well rounded. I know many offspring of baby boomers and many have no intention of buying. They place a higher value on location, mobility, and having free cash to travel with close friends. The data also shows that the family unit is becoming much smaller and many are opting to have one or no kids. Why the need for a 3/2 then? This isn’t the 1960s where bigger households were common and one income was enough to live a middle class lifestyle. Yet some boomers are trying to assist their kids in buying their first home and in expensive areas, the passing of wealth is occurring in ways that may not be typical.