What constitutes a bubble? It is always difficult to call a bubble while you are living deep in one. For housing, a good metric was looking at local area incomes and what those in the immediate area were able to afford. But in a place like San Francisco where foreign demand is incredibly high, a high percentage of demand is coming from abroad, in particular from China. You also have big investors jumping in. Sure, if you want to qualify for a mortgage you will have to demonstrate sufficient income to purchase a home but what if you come in with cash? While the LA/OC area is the most unaffordable real estate market in the nation based on local area incomes, the San Francisco market is the most insane based on market prices of homes. Home values in San Francisco are up a stunning 72 percent from Q1 2011. Incomes don’t even remotely come close to keeping up with this. In fact, people in the San Francisco market are having a very tough time making their rents, let alone trying to chase after million dollar crap shacks. San Francisco makes SoCal look relatively mundane when it comes to real estate.
One of the many interesting dynamics of the current housing market is the lack of new home sales and also, new home construction. New housing construction tends to be a boom for the economy across all income levels. Why? People when buying a new home also tend to fill the house with the general crap that occupies a place (i.e., new beds, stoves, microwaves, televisions, etc). This crap filling exercise sets off an avalanche of economic activity. You also have construction and the inherent supplies that go into building a new McMansion. Yet the new home buying audience in Millennials tends to be in a tighter economic position than their Taco Tuesday baby boomer parents. For these reasons we have an unusually large number of grown adults living at home with parents. It is highly doubtful that these grown adults are suddenly going to cause a surge in more expensive home buying. But the new home buying that is happening is going to a smaller group of people pushing prices higher on a small amount of inventory.
America is the land of second, third, and even fourth chances. The same applies to house lusting buyers. The National Associate of Realtors (NAR) had some interesting data regarding potential future home buyers. Their analysis found that between 2006 and 2014 some 9.3 million homeowners were foreclosed on, received a deed-in-lieu of foreclosure or short sold. Bottom line, there were a boatload of people losing their homes when it was once thought to be the safest investment. We are a forward looking species and the NAR realizes that many of these foreclosure veterans are ready to get back on the home buying bandwagon once again. The problem of course is that most are buying inflated properties with massive mortgage leverage. Debt with low interest rates is the elixir of choice. So how big is this potential pipeline?
People always mention a few items when it comes to real estate values. For California they highlight location, mileage to freeways, weather, and access to employment hubs. Well if you want a good deal and according to some, every single part of L.A. County is going to gentrify so you should simply purchase in the most affordable zip codes. The argument is that if you get in early on a gentrifying neighborhood, you can make out like a bandit. This logic is usually coming from the Taco Tuesday crowd and those aspiring to purchase a hardwood floor stucco sarcophagus. So today we’ll look at four properties in Paramount and Compton. They meet all the criteria thrown out by the gentrifying crowd. People mistake luck with investing acumen. The 1,000,000+ that lost their California home to foreclosure isn’t speaking too loudly (just like those who bought Enron stock). But when it comes down to buying, they usually want others to take the first step especially in areas that might transition. Let us take a look at some of the deals to be had.
There have been a few reports highlighting that the LA/OC housing market is the least affordable in the nation. A more recent analysis by the Economic Policy Institute (EPI) found that 57 percent of Angelinos fall below a basic budget presented. We’ll show the budget shortly but these kinds of reports highlight the growing divide in many metro areas around the country. Having across the board housing price increases and rent hikes come at a consequence when wages are stagnant. For the L.A. metro area, what we have seen is a big shift to rental households (L.A. County is a majority renting county). People may forget that the cost of living is high in the Southland even beyond housing. Many want to buy in a good school district and many are willing to dive into a crap shack for the kiddos. But many households wind up in the two-income trap; daycare, added healthcare costs, and ancillary school services to keep up with the neighbors. Housing in the form of mortgage payments and rents is eating up a larger portion of disposable income.