The amount of money being spent on rent is at generational highs. High rents make it tougher for potential home buyers to save up for a down payment and this trend has impacted Millennials greatly. What is interesting looking at nationwide data is that while rents are consuming a larger share of income, those with mortgages are spending less. This is interesting because it doesn’t coincide with the big drop in the homeownership rate. But it makes sense. After all, investors are spending a smaller portion of their income covering the mortgage and those that did own, likely refinanced into record low rates. The trend is clear on a nationwide basis but not so much for markets like those in Los Angeles. Let us look at the latest figures.
Big Wall Street investors stopped buying real estate in large quantities back in late 2014. In many cases big investors had front row seats at banks and were able to buy in bulk and for incredibly low prices not offered to the public. This crowding out of course has caused two major things to unfold: inventory to dwindle and a push up in prices for regular families looking to buy. For the first time in history many things happened in the housing market including nationally falling prices but also a large interest from Wall Street in single family homes. Now with prices near previous peak levels many of these large investors are making the full exit by offering to sell the homes to current tenants, for of course a modest increase. Those bailouts that were geared to helping the public actually created a system that has slammed the homeownership rate lower and has now jacked home prices up once again. Large investors are now making their final play by cashing out.
The honor of the most expensive county in Southern California goes to Orange County. There has been a nice steady increase of inventory in Orange County over the last year. You have places like Irvine that are building new homes at a quick pace (although a large number of these homes are being bought by foreign buyers and investors). There is now a healthier amount of inventory on the market. Inventory for the county is up 14 percent over the last year. Summer tends to be the time when inventory peaks so we’ll see if we level out at this point or begin trending lower. One thing that continues to go on is aggressive flips. These flips are happening in lower priced areas where older homes are typical. Today we’ll take a look at a Garden Grove property.
The rental revolution continues unabated in this country. While everyone is now trying to be on the home buying train, sales figures don’t really reflect a major shift. Desires don’t always coincide with what the market is doing. Prices are largely being driven by tight inventory, investors, and low interest rates. Prices can be boosted by low rates but rents need to be paid out through real earned income. This is important to understand especially in Los Angeles County with 10 million people and the majority of households actually being renters. The reality is, today’s renters are worse off than their parents. Over the last decade we’ve added 10 million renter households while homeownership has been stagnant – largely by 7 million completed foreclosures. How bad has the rental situation gotten?
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.