Some of you may remember San Francisco as it was in the 1970s. It was a place where those with very little income still had the chance to be welcome regardless of earning potential. In fact, much of the city’s vibe went against the machinery of capitalism or old forms of traditionalism. So it is ironic that today, it has become one of the most expensive cities and many that live in the city practice a magnified version of NIMBYism causing housing values to rise to stratospheric levels. It is no surprise then that the typical rent in San Francisco is $3,200 per month for a basic apartment and only 36 percent of households actually own. This in a market where tech workers earn good income. You have many tech workers doubling and tripling up just to cover the rent. Others are living at home with their parents. In California if there is a will there is certainly a way. The interest only loan is making it possible for those on tight budgets to speculate heavily on real estate. What if I told you that you could buy a $1 million home with a $2,000 mortgage payment per month?
The current homeownership rate has fallen to where it was two decades ago. The demand for home buying from traditional buyers is simply not there. Recent surveys find that the majority of Millennials would rather rent than buy. This is the group that will need to pick up the slack moving forward should the housing market return to any normal environment. But what is truly normal at this point? Over the last decade we have added 10 million renter households while actually losing 1 million owner occupied properties. The recent buying spree of 2013 and 2014 came in the form of investor demand. Real estate has become simply another speculative silo for Wall Street to speculate on. And many buy it up. Across the nation, home prices with current interest rates seem reasonable with the median priced home running close to $200,000. So why is the trend still pushing towards more people renting? Is this simply a nationwide trend or is this also impacting high cost states?
One of the dirty perceptions put out there is that home buyers stay put in their homes for many decades counting their days until the mortgage burning party arrives. The real estate pitch is always built around longevity. Think about your future kids, dogs, and the ability to paint your walls hot pink. In reality however, the average home owner was staying put for roughly 6 to 7 years before the housing market went off the edge. Many current owners are staying put because they still want those juicy peak prices and many were underwater. Others are staying put because they leveraged the daylights out of their properties. The latest figures show that current owners are staying put for longer because of the economy and this has had a big impact on the available inventory on the market. This is why those in the market to buy today are largely relegated to competing for crap shacks in areas where schools are subpar and construction is shoddy. There is an odd sort of capitulation going on today. It is speculation masqueraded as prudence. Even though momentum has stalled as smart investor money pulled back in 2013 and 2014, you have some ready to dive in just because “you only, live once†as if this was reason enough to plunk down a crazy amount of cash for house that looks like it belongs in a Hooverville. But for most of the country, real estate is priced to move. So why is inventory so low?
People lose perspective all the time when it comes to housing. In California we have this deeply rooted #YoLo movement where people are willing to spend every nickel in their wallet for rent or leveraging into a crap shack. The buy now or be priced out forever rhetoric was strong in 2013 and 2014. Today it has waned as people regain their senses one by one. As investors pullback current prices are meeting a pesky wall of resistance called “income†even though all you need is basically five percent down and two working stiffs to buy. So it should be no surprise that when banks run the numbers not many families qualify because of debt-to-income ratios. Culver City is a perfect example of a mania in action. People want to buy crap shack number one to leverage into a bigger home. Of course this assumption is all based on a greater fool theory and California is boom and bust central. Numbers don’t adequately show the full story. Let us take a look at what we can buy for $700,000 in Culver City today.
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