Why must you call it a crap shack? In the last year people have gotten extremely sensitive when it comes to calling certain homes crap shacks. Maybe Taco Tuesday baby boomers should drink a few more shots of tequila before jumping on the internet and being angry that they live in a $1 million crap shack. In reality, they live on expensive dirt with a poorly designed and built property. In the heat of a mania like the darkness of a posh L.A. club as 2AM nears, things might look better than they really are in full sunlit reality. But this real estate pig has more makeup than a clown and it is starting to show. The market has hyperventilated with over exuberance and some people are now cashing in their chips. 2017 is going to be an interesting year for crap shacks across America.
2017 starts with US housing markets in full mania. This recovery is largely disconnected from household wage gains and with the election results, mortgage interest rates surged making housing even more unaffordable. Now while this blog is largely focused on California and many see things through the Hollywood only lens, a large number of metro areas across the nation saw wicked price increases. This price jump has come in an environment with tight inventory, investors, and low interest rates (until the end of 2016). The fastest growing markets in terms of price gains are not in California. In fact, the top 10 metro areas with more than 1 million people are all outside of California. Will this trend continue into 2017?
The last year homes were this unaffordable to American families was back in 2008. If you remember in 2008 the market was in full on implosion mode. Of course that is now a distant memory and those 7,000,000+ foreclosures are simply a distant nightmare. The nightmare now turned dream of purchasing a $750,000 or $1 million crap shack is the ultimate goal in this manic market. While this is a dream for most the housing market is incredibly unaffordable. Housing affordability has dropped to an 8-year low because first, home prices are surging without wages keeping up and mortgage rates recently surged. Many families had been leveraging up in this low inventory market and locking into mega mortgages for a piece of the crap shack pie. With rates going up getting a piece of that action is now more expensive.
There has been little discussion in 2016 regarding the volume of all cash buyers. We have grown accustomed to anomalies in the housing market. Rapid dips and jumps in prices are now assumed to be a part of the system. Massive numbers of investors buying single family homes are now assumed to be status quo. And the number of all cash transactions is seen as normal when in fact, all cash buyers were usually a small part of the market. All of this is abnormal in the housing market pre-2000s but we are now living in a very different world. Yet people still have a hard time understanding the volume of all cash buyers in certain markets. Clearly most of these buyers are investors. Even a home costing $200,000 is out of reach for the regular family living paycheck to paycheck without a mortgage. And mortgage rates just increased at their fasted clip in many years thus making it more expensive to buy a home. In some markets, cash buyers dominate sales volume.
When investors look at markets they factor in a multitude of variables. Large investors were looking at capitalization rates and also local economies when buying rental property. For the first time in US history did we have a nationwide effort by large investors to buy up single family homes. This of course has caused a big dip in overall available inventory but has also pushed many home builders to focus on what the market was demanding which turned out to be more rental housing. The Los Angeles metro area (which includes the OC) has some of the weakest value for rental investors. This for a region where the majority of households rent. For example, the entire LA metro area has 19.7k homes for sale with a population of 13 million. Compare this to the D.C. metro with 19.2k homes for sale but with a population of 5.6 million. This is why you see some zany behavior when it comes to buying. But how do things look for the largest metro areas in the rest of the US?