The housing market without a doubt is slowing down and it should be clear that the “hot” summer selling season is simply not going to materialize. Even in house horny Southern California, sales are down 12 percent year-over-year and the median price actually fell in July from June. Typically, the sunny California sun fries the portion of the brain looking at math during the summer but something else is going on. People also conveniently forget that 7,000,000 foreclosures have occurred since the housing bust hit with 1,000,000 happening here in the “never a bad time to buy” California market. We recently discussed the incredibly hot rental market in the state. It seems that rents are having a good run over the last year as more Americans welcome their new feudal landlords from Wall Street. In fact, we now have the highest percentage of households renting in 20 years. If we look at the data, what we find is that housing is simply consuming a larger portion of income for households. It is amazing how many people in California have absolutely no comprehensive plan for retirement. They are willing to leverage every penny into housing but ignore other important areas like building a balanced portfolio. Taco Tuesday baby boomers sit in million dollar crap shacks welcoming their student debt laden children back home while they feast on Purina Dog Chow. It is pretty clear what is going on right now: more of your income is being consumed by housing.
Do you enjoy sleeping in your closet? Did you ever dream of living in a box similar to your cat or dog squeezing into those tight spaces? Then we have the right homes for you in Pasadena! It is interesting to see how people will justify prices especially on home flipping shows. “I won’t live there but I can see why it makes sense!” “That floor will add $20,000 immediately!” “That tiny bit of work on the lawn suddenly added $25,000 in visual value.” It all makes sense until it doesn’t. For those of us with some life history in California, we realize this is a boom and bust state. Some of you are aware of the Fancy Feast eating baby boomer neighbors who are sitting on a California goldmine but just can’t quit the state. Virtually every other week I’ll get an e-mail about someone spotting a neighbor with so many cars piling up on the outside that you would think they are starting a dealership right on your street. Or what about those broke Millenials and Generation X “kids” moving back home because they can’t even afford the rent? This is the state of the current California housing market. Today I’m going to show you some sub-$500k homes in Pasadena. Sure, you’ll have to forgive the lack of square footage but at least you will be in a prime area!
The rent is too damn high in the Bay Area. I’m sure many families in the Bay Area utter this on a monthly basis as they send their rental checks to their landlords. The median rent in the Bay Area hit $3,200 in the first quarter of this year. The booming tech industry has been a big win for Northern California real estate although for many, it may not feel that way. Investors have been a dominant force as well in Northern California. Investors have been dominating the US housing market for nearly half a decade and are now only starting to show some signs of pulling back. San Francisco is an interesting case study of an area undergoing rapid ultra-wealthy gentrification. The median home price in San Francisco hit $1,000,000. On a monthly basis I will get e-mails from tech workers talking about their two income households being unable to buy in the Bay Area. Interestingly enough San Francisco makes Southern California look like a bargain. What you are also seeing is a deep hollowing out of the middle class in the US but it is incredibly visible in places like San Francisco.
In many markets, investors were purchasing properties to rent out for a short period of time before they had any intention of selling. Many of the large investors have hinted at buying places and holding them for 5 to 7 years before selling them off. Since big money entered the market in 2008, we are already seeing that phase one is being completed and big money is certainly exiting the market. The impact of course is what you would expect. Take a look at Arizona for example. In the Greater Phoenix Area, cash buying now makes up “only” 24.8 percent of all sales. This is the first time since 2008 that it has fallen under the 30 percent range. And what has happened because of this? Inventory has shot through the roof increasing 35 percent year-over-year. Because real estate trends move like molasses, the next phase will likely include pressure on prices (which we are already seeing). The Arizona market was hyper obsessed with big investors. As those investors pullback it is no surprise that inventory is shooting up. Yet the psychology of the market is always lagging because prices peak when inventory and sales are changing and this tends to be a better leading indicator. Arizona is an excellent example of a market where investors are now pulling away.
The low turnover in housing is having some organizations changing their tune regarding the current boom in home values. After all, places like the National Association of Realtors (NAR) will be better off with higher sales volume and lower prices versus very low sales volume and higher prices. As we see investors pulling back, the already low volume is dropping even further in what is typically the house lustful months of the summer. In virtually any three month period over the last 60+ years you would typically see the number of homeowners far outpace the growth in renter households. That trend has reversed since the housing bubble popped. For example, over the last 3 months the number of renting households went up by 312,000 while the number of homeowners went up by 54,000. The trend to becoming a renter nation continues. The NAR actually is echoing a similar tune to what we are seeing and that is many young households are income strapped and many are living at home and will first go out and rent before buying a home. So this trend is likely to continue. Rents are heavily dependent on local incomes and jobs. We’ve had a solid run since 2009 in regards to the stock market and things are looking a little bit frothy at this point if we look at price-to-earnings ratios and also overall sentiment. So what changes when we add over 7 million renter households over the last decade?