Saying goodbye to the California middle class. California least affordable state in the entire country as renting class expands.
California for a generation has been a high cost of living state.  This is no surprising revelation.  Yet the tech boom in the 1990s set the state into a unique stratosphere of real estate.  Hundreds of thousands of jobs now depend on big tech companies including Facebook, Google, Apple, and other common names.  Changes like this have added to drive up in real estate values.  New data highlights that California’s metro areas are the least affordable for those looking to buy based on the families living in those areas.  Of course, investors are bringing outside money so that is one way to move around this new reality.  Unlike an Ohio or Nebraska, California real estate is global in nature.  The only problem today is the massive gap is pushing many middle class families out of reach from buying a piece of real estate.  It is becoming more challenging for families to purchase real estate in California and the data backs this up.
California has least affordable metro areas
Trulia ran some numbers on metro areas and the least affordable markets are here in the Golden State:
Source: Trulia
San Francisco, Orange County, and Los Angeles rank as the least affordable markets in the entire country. Â Only 14 percent of homes for sale in San Francisco are currently affordable to the middle class (and this is tech central). Â Orange County and Los Angeles rank at 23 and 24 percent respectively. Â Over the last year, this drop in affordability has come by the massive rise in prices.
This is a problem with booms and busts when household incomes do not follow real estate values.  You can see that late in 2012 prices were much more affordable based on market values and rates.  Yet today, only a small portion can purchase without over stretching their budgets.  That is why you have investors completely dominating the market and families looking to buy today are stretching beyond what is reasonable to play this game.  Agents are telling buyers to offer $50,000 and more above list price just “to get an offer considered.† Thankfully from recent trends, this madness seems to be abating.
At least when it comes to real estate, California is no place for the middle class.
Incomes simply not keeping up
Incomes absolutely matter and when we look at other markets, we see how little inventory is available for the middle class:
Only 24 percent of for sale homes are within reach for a middle class family in Los Angeles. Â And these 24 percent of homes are probably in lower priced areas like Palmdale, Lancaster, Compton, or Bell for example.
Places like Chicago and Miami are much more affordable even with the current inventory on the market. Â Some people tend to think this has not impacted moving patterns but it has (simply looking at population growth may not help).
Many have moved out
From 2000 to 2010 California has lost 1.4 million domestic residents (this was largely made up with foreign migration). Â This is likely a pushing out of the middle class. Â Americans deeply want to own real estate and for many, it is unlikely to materialize in California. Â However many others simply will not move and look for alternative options. Â One of those options is renting and this has grown since the crisis hit:
The renting class continues to grow in California:
While we’ve lost 233,000 owner households we’ve gained 500,000 renting households from 2007 to 2011.  That is a big change.  This trend has continued if we look at the ownership rate.  Plus, you have big money investors buying up blocks of property so in reality, you have one owner taking up countless properties unlike a family that essentially owns one place.  Big money is dominating the game.  California has become an even more challenging place for middle class families to live especially if they aspire to own real estate.  The fact that home prices went up by 30 percent last year is stunning in the face of stagnant incomes.  Even those with rosy colored glasses realize this pace is unsustainable and call for moderate appreciation in 2014.  Next year will be interesting because inventory is already rising and cap rates are abysmal at the moment for investors.  The flipper trade is growing but that can turn around very quickly.
The fact that California is the least affordable state is no secret but the dramatic change over the last year highlights the boom and bust nature of our real estate economy. Â California just got that more unaffordable for the middle class. Â What is ironic in all of this is that many policies are put into place that try to help the middle class (i.e., rent controls, Prop 13, etc) and these actually have backfired to only make properties more expensive. Â Similar to the Fed artificially lowering rates, the big winners have been the big banks and not the middle class. Â At least with real estate, interfering with the market seems to be a big loss for the middle class.
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78 Responses to “Saying goodbye to the California middle class. California least affordable state in the entire country as renting class expands.”
I finally gave up a few days ago when I signed a one year contract to rent.
Until that point I lived at home while earning around 85K a year for the last two years. I saved up 60K in that time and the amount I have saved has been trumped by the rise in property values in Los Angeles.
It’s useless and pretty disheartening as a 27 year old. I’ve worked hard only to be outmatched by investment firms and foreigners with suitcases full of cash – not to mention low inventory etc. etc.
I think at this point I don’t ever want to own in California. Working and renting while buying elsewhere to rent the out of state properties will be my only viable choice. Hopefully I’m wrong and there will be a crash in a couple of years to stifle / reset this bullshit recovery and housing market.
Drew,
You are echoing my thoughts (as well as many of my friends). I’m 28 and make $80,000+ however prices are so out of sync with reality that its not worth it. Doesn’t help that we’re the generation that has over extended itself on student loans so why take a chance on real estate when the risks outweigh the reward.
Examples of overpriced real estate: I recently moved to east Ventura County and had a realtor tell me that the 80s style suburban nightmare of a neighborhood, the average home (3 bed, 2 bath, 1800-2000 sq ft house) would cost mid $400k. Then flip on house hunters and watch a douchey mid-west couple scope up a charming craftsman home with 4 bed, 3 bath 3000+ sq ft house with a real lot for $325k.
For these reasons, I’m feeling Drews pain and will elect to rent until prices drop substantially or I move.
Where is that east VC neighborhood where you can still get 1800-2000 sqft for the mid 400s? I live around there in a tract of crummy little 1200-1400 sqft 40 year old starter homes and *they* are going for mid-4s to mid-5s now. I’m not happy about it, but I don’t see much sign of it slowing down.
east Ventura County – That’s our area as well.
In the 3rd qtr of 2012 the home we bought was a major fixer listed at $400K. We got a small discount for this 2,000 sq ft one-story and proceed to make it livable. It needed everything including a roof. $300K would have still be a fair price to the sellers. My God, we pumped 10’s of $1,000’s into this 1960’s tract home, but so little was on the market (even back then). $hit happened and we needed a forever home paid for.
Since we moved in the same floor plan is listing at $550K, 14 freak’in months later. The prices are bubbliciously insane. WTH are the PTB thinking? Blowing up the prices again is good for no one. 3% a year worked fine for decades.
Go FHA in a prime area good location, you should be safe. Just monitor the markets. When RE market “pops”, or deflates, the subprime areas will go first. Much more investor activity in those area relatively. The prime areas will lag by 2-3 years.
Again location is important. Don’t buy near freeway exits, steel bars in windows.. And me personally I don’t buy in a city where people actively use public transportation. If ur neighbors are riding the buses, those are the wrong neighbors. There are always exceptions but those are general rules I go by.
Same Deal for me too Drew. I don’t make quite as much as you, but I am still making a fair wage. Lived at home for several years to build up a bankroll. Almost bought a few times at the bottom, but didn’t want to rush into anything. I figured the market would trade sideways at best for a few years. I stopped looking over a year ago after the first leg up in the second half of 2012. I think our patience will be well rewarded. Homes in hot markets of Cali should drop 50% when this second credit crisis hits. With Yellen at the helm it sure as hell will. Protect your assets and wait for the firesale.
Yellen is more likely to ramp up QE rather than take it down… zerohedge.com has done at least one good review of her history and prior statements. She’s just another of the academics that has zero actual business experience…
@Jim Taylor, I agree about Yellen. Yellen will be a total complete clust@rf#ck. Yellen is Helicopter Bernanke on steroids, and has admitted that she misunderestimated all of the warning signs leading to the economic collapse of 2008.
As I’ve mentioned previously, QE is not going to end until the Federal Reserves’ member banks have unloaded a significant portion of the garbage loans/properties from 2003 to 2008 on to investors, all-cash buyers and debtors with excellent credit (and +20% cash down payments). When that day happens inventory will return to normal levels and affordability returns to California.
Excess reserves is the number to watch regarding this. Excess reserves were a mere $10 billion in August 2008 , about two months before the financial meltdown, it is now about $1.8 trillion (http://research.stlouisfed.org/fred2/series/EXCRESNS). Excess reserves really represents the estimated value of the bad loans sitting on the balance sheets of the Fed’s member banks. In a normally functioning economy, this number would be quite small.
@Jeff
That’s the great thing about Yellen, she’s anothwe dumb ass academic who doesn’t get it. More QE will get maybe another year added to this fake boom, but it will make the crash that much worse as QE is destroying the average consumers purchasing power. When Bubble 2.0 pops the pool of buyers will be small. No institutional investors. No flippers. Very little FHA. Keep your powder dry. The FED is or already has lost control of the bond market and Tech Bubblr 2.0 popping is goingvto wipe out a lot of the overpaid yuppies we’re comoeteing with for properties. It sucks to watch them play this game but were within a couple years of the end. This type of central planning BS hasn’t worked one single time in economic history. Bernanke’s Supet Bubble won’t be the first.
The housing market traded sideways for the past few years but took a sharp turn upward April 2012. That is when the bulk of investment and cash buyers were on the scene. There was a window of real opportunity but it’s hard for the average investor to see it till it’s hindsight.
Don’t buy anything now especially if you can wait till the next boom/ bust. This market will crash again…they are predicting a stock market crash at the beginning of 2014 and we will have to see if it is a correction or technically more. There is no real stability in this economy. The patient is on Qe life support, and cannot breathe on it’s own. When markets crash everything goes down, real estate, gold, silver, stocks. Deflation is what the Fed is fighting against. In deflationary times everything goes down and re-sets but the Fed won’t let that happen.
Deflation kills the banks balance sheets and the banks are trying to get the bad loans of their books while getting the Fed’s infusion of cash to keep the loan game going. The banks don’t even need customers anymore, they got the Fed. If the banks do go down get ready for bails ins, capital controls, “bank holidays” this whole economy is about propping up the banks and nothing else. There is no exit strategy from this charade.
Wait on the sidelines with cash…only when this market crashes will I buy real estate, stocks, gold, silver. People with big 401k or stock portfolios should not blindly think 2008/2009 could not happen again. It can and it will and this time Fed money won’t be able to pump the market up with Qe money, the patient will be dead. Being a day late will be too late.
Returns will be flat like Japan for many years as our baby boomers age out. Baby boomers are deflationary. They spend less on everything, gen xers don’t have the numbers to replace their purchasing power. We are looking at down markets because of demographics. Japan had these same deflationary demographics also.
Company profits are at all time highs but revenues are flat, this is another media manipulation to make us all think the stock market and economy is doing great! Employment is down but labor participation is going down also. Housing is up…because the Fed is artificially keeping interest rates low and herding bank depositors towards housing for returns. These are all fake headlines to make it seem like our economy is doing well.
Prices will drop 50%? I’m assuming that was a typo because you can’t really believe that. Either that or the 20 something crowd (no offense here) hasn’t been around long enough to see a few ups and downs in the real estate market.
Kudos to Drew for saving that much over the last 2 years. My prediction? It will rise some next year..and then look for a bit of a drop or a sideways movement as rates increase. Still coastal property in Cali will always be at a premium more so than inland.
Drew, you are still very young. Keep saving for a few more years and you’ll be in great shape to buy. The majority of my friends made their first home purchase right around age 30. As some else mentioned, it’s disheartening to watch HGTV and watch very young Midwest folk buy a sweet house as soon as they land their first real job. Unfortunately that’s not going to happen in desirable areas of CA. Unless you are a trust fund baby or newly minted tech millionaire, everybody needs to pay their dues…and that means renting and saving. Good luck.
Don’t worry about it at all. You don’t need a house, especially at 27. Rent a really nice place and still save money.
Act and think like sheep…..get shorn.
look in riverside, NORTH san bernardino (north of 210 fwy), rialto, colton, fontana, hemet, san jacinto, banning
you can find a nice 1500 SF+ SFR for under 200K.
a great thing to do is (make a friend at an insurance company, who will give you an insurance quote) or just call a home insurance company (farmers, etc) and give them an address, if the insurable value is more than the price you are paying you are getting a good deal. If you can buy a house for more than it costs to build it from scratch you cant really go wrong. Hemet/San Jacinto/SB/Banning you can still buy nice 3-4 bedroom SFRs for damn near nothing under $130K!! and they will rent for almost a buck a foot (1300 SF = $1200-1300/month rent)
I just bought a 4 bed/2 bath SFR 1,350 SF with 2 car garage for $125K! The insurance co. just sent me the quote, they have the replacement value at $185,000, think about that for a moment.
Stop saying you are “going to wait til values drop by x% before you buy” that says you are trying to time the market…..timing markets is damn near impossible, otherwise everybody would do it and there would be millions of billionaires and few trillionaires (I think we will see a real trillionaire in my lifetime)
if you rent because it’s close to where you work, great (I hate commuting/traffic/etc) but drive thru some of these neighborhoods where you can score a nice SFR for under$150K. I’d buy one or two or 10 while they are still available for less than they cost to build, trust me….you will be very very happy in 2-3 years when your investment has doubled in value (all the while a tenant has been paying your mortgage for you…). CA has nice weather and decent job opps, people need a place to live why not provide a nice place for someone to live and make some money at the same time?
WTF are you rambling about? And where is this b.s. coming from? Even these neighborhoods are $250k now.
“Stop saying you are “going to wait til values drop by x% before you buy†that says you are trying to time the market…..timing markets is damn near impossible, otherwise everybody would do it and there would be millions of billionaires and few trillionaires (I think we will see a real trillionaire in my lifetime)”
BS. Plenty of people time markets and while it’s rare to hit a perfect top/bottom in our centrally planned clusterF@%^ of an economy you HAVE to time your purchases of any asset or commodity. here are only two ways out of our current situation a somewhat slow and steady deflationary trend that will last a decade or more or a continued inflationary swing, followed a by a near term deflationary crash. We will probably get the latter as Yellen and Co still think they can play God with a multi-trillion dollar economy. And those IE Real Estate prices may not look so good as water continues to get more expensive and even McJobs continue to be hard to come by. The Petro-Dollar that has enabled the inflationary Billionaires you speak of is under more pressure than ever as well…
“Deflationary er”? We’ve had that for the last 8 years. The feds poured the first $4 trillion down THAT black hole so that gas wasn’t $.25 a gallon, the median income $8,000, and tax revenue to the government declining to negligible.
With $17T in current federal debt, something similar in unfunded state and private liabilities (especially in pensions), the ONLY way out is to INFLATE the cost of it, now equal to $100,000 (average) per citizen (including the 25% not employed, the 20-30% underemployed, and the impact of all the lower income citizens the country will add by taxing middle class down or immigration (so we have SOMEBODY to handle the undesirable jobs in the food service, hospitality, and ag sectors). That means all you wonderfully paid persons over $50-55K per year WILL carry a higher percentage of the debt — not just 1/317,000,000th.
This all starts when we can no longer kick the debt cans down the road (i.e. foreigners and domestics no longer buy US debt at low, low, low interest rates, and the government quits carrying bazillions just because the have “the full faith and credit” of the US goverment saying they CAN make more $ Trillions out of computerized electrons without many saying that the Emperor has no clothes.
The Emperor has had no clothes — no backing besides public greed — for much of the money since that first $4 Trillion (which radically slowed deflation).
I’ve heard it said that if you’re going to buy deep inland in California, away from the coast, especially in the Inland Empire (which is where Hemet is), then you may as well buy in Nevada or Arizona instead.
Inland Empire is a hot desert, far from the beaches, its weather identical to that of Nevada and Arizona. Except that in Nevada and Arizona, taxes and government debts are far lower, so their economic outlook is stronger (especially Arizona’s, which, unlike Nevada, doesn’t overly rely on gambling).
If you’re not living near California’s coasts, you may as well not live in California.
Yup that’s about the size of it ya nailed it.
I have been actively reading this blog for the past two years. I am a native of Los Angeles. I appreciate this blog mainly because it is one of the only sources of information regarding real estate that is based on the perspective of middle-class, single family homebuyers, and which counters the unflaggingly optimistic reporting in the media. However, this blog is not without its problems. First, much of the reasoning offerred is circular, fueled by questionable empirical methodilogy (mashing together stats from various sources to support previously reached conclusions). Many of the posts, sadly, are unnecessarily tinged with xenophobia. Commenters assume that the brunt of the impact is felt by middle-class wage earners, but ignore the disproportionate impact on the homeless, unemployed, elderly, and destitute. I think this blog is overly pessimistic. Since reading this blog, I purchased an 800-foot condominium loft in downtown Los Angeles for under $200K (during early 2012), which I refinanced in March to a 15-year, 2.625 interest mortgage. I rented out the loft and the rent covers mortgage and HOA fees. I recently purchased a 1,900 square foot impeccably restored (over the last decade — not a flip by any means) Craftsman home in the mid-$550Ks in a desirable suburban neighborhood about 12 miles from DTLA. It is not in a trendy Westside neighborhood, but that means nothing to me. I started out with less than $10K in savings and over $100K in educational debt. Nothing was given to me. Now, I have a great deal of equity in my condo, plenty sored away in retirement, and a strong emergency fund. I own two cars. I am only 28. Unfortunately, it takes a certain tolerance for risk to succeed in SoCal (families should not have to compete with investors to own a home anywhere in America). However, you can sit and complain, or face the music, prepare, watch for opportunities, hope for the best, and prepare for the worst. Instead of complaining (about the crime, the “illegals,” the traffic, the housing prices, and so on and so forth ad nauseum) why not think of ways to strengthen the neighborhood you are in, make a positive impact on the local community, give back? Worst-case scenario — rent, save, and enjoy Southern California. There is only one set of rules I have learned from real estate that I stick with and which I will share with you: “buy only what you can afford and no more, buy where you have roots, buy only if you plan to stay put. If all potential buyers stuck to this plan, real estate in California would make sense.
Your post is ludicrous. Where did you get the money to purchase the $550,000 house? And, if you are 28 and have a $100,000 student loan you still owe 10 years at around $900 a month, if not more.
Not at all, Fulano. As a public servant, I am repaying my debt at a reduced rate (under the income-based repayment plan) until the remainder is forgiven after ten years of public service (so more like $500 a month). As for the house, I saved to make a 5% down payment. Admittedly, I had some help by way of the VA loan, another government benefit I earned the hard way. Certainly, you can argue that I am over-leveraged, but my wife and I can comfortably afford the payments, we have roots in the neighborhood, and plan to stay raise a family there, and both of us are children of immigrants who worked as maids, welders, and street vendors (read: the American dream) — hardly proponents of flip-and-get-rich schemes or beneficiaries of trust-funds like you might have imagined. Listen, I’m certainly not saying the market is fair. What I am saying is that you can play thie blame game, or, for those who are employed, you can lace them up, save, invest wisely, and earn a decent living. There is a thin line between criticism and just plain whining. It is called “the American dream” not “the American Guarantee.” Like I said early, if you buy what you can afford in an area where you are happy to stay and give to your community, then you are on the right path. If you cannot afford to buy, then rent and wait it out. Better to be a part of renter nation be stuck with a house you neither want nor can afford.
@Debt Before Dishonor
How do qualify for reduced loan payments by half on the Income-Based Repayment (hardship) and still have the income to qualify for a mortgage on a half million?
I love how you word the end of your comment as if it’s bad to complain about this mess. If you have the type of income to take on that massive debt at 28 years of age, then you must know you are RARE. Meanwhile, back in reality, most of Americans aren’t doing too well.
Why do you have a problem with data from different sources? If anything, having non skewed data from multiple sources will help draw better conclusions.
Do you want people to congratulate you for buying overpriced housing with your abnormally large income? If by chance you don’t have an abnormally large income, you’re even more screwed.
MORE pessimism is needed. This economy is a mess. If anything, I think this blog doesn’t go far enough. It’s easy for some middle aged people here who still have great jobs to buy overpriced housing. For the majority of Americans, though, even a house for 250k is out of the question. This idea that it’s “affordable” for a family with a median income of 50k a year is hilarious, and that’s not even touching the outrageous prices in SoCal.
You are quite right CeeCee! There are far too many condoning the status quo in the real estate market, pushing middle-class families out and down while investors get rich. The status quo preys on the financial ignorance of the masses. Sadly, many (not all) of our “informed” commenters fall into two camps: they either (a) decry the system and keep themselves completely out of it thereby losing out on the opportunity to derrive any of the potential benefits that might exist for them or (b) blame people who have little to do with the current situation. It disappoints me to hear the former and pains me to hear the latter. Clearly, undocumented immigrants, of whom there is a net defecit entering the country, and who are typically low-wage earners living in predominantly lower-class, immigrant communities as renters have little to do with the current state of our real estate market in Southern California. Our boom-and-bust market has everything to do with financial misinformation of purchasers at the hands of the media, govenment, and real estate professionals as well as basic greed, overpopulation, and the impact of real estate investors. Rather than kvetch about “the illegals,” why not seek to reduce the mortgage tax deduction (which only benefits the rich), rail against flippers and shady realtors, and ask what we can do to normalize our real estate market? That would seem to be the only sane thing to do.
You’ve been a landlord for around a year or maybe less and you’re offering advice to the rest of us! Ha ha ha, good luck buddy!
By the way, a lot has been given to you in the form of leveraged fiat money. You can thank the rest of us users of the monetary system for our participation in backstopping that which helped to enable your debt creation opportunities.
Finally, here’s some advice to you. Change begins with a complaint against the status quo. Don’t expect others to squelch their discontent because once you decide to acquiesce to it.
Actually, Joe, I was providing advice on how to be a decent persona and how to be a productive member of a community, not landlord advice. And thank you for bankrolling my future. Actually, I worked to keep my debt down through grad school, obtained more than one private scholarship, and will ultimately pay more than half of my educational loan over ten years. For its money, you the poor monetary system backstop receive a government servant for ten years, a hard-working member of a local community, and financial returns in the form of property taxes and years worth of payments in the form of interest on my loans. I got it. Our government taxes the hell out of us, but you my friend have not bankrolled my future.
I’m calling bullshit in the intentions of your post. You clearly stated that you’re a landlord and framed it in the context of a success story that others could aspire to. Not sure that has more to do with being a “good person” versus being a rent seeker.
We are all supporting your debt opportunities by participating in the same monetary system. A system by which we don’t have the option of opting out of since our taxes can only be paid in dollars. If you didn’t have the rest of us participating, those opportunities would not be available. As far as your government job, direct and indirect taxes pay for your labor, so don’t get it twisted.
Do you not see the irony in lodging a complaint about others’ complaints?
“Commenters assume that the brunt of the impact is felt by middle-class wage earners..”
You’re f’ing with us, right?
Not messing with you at all. Just stop by skid row in DTLA some time. Not saying the middle class has not sufferred — it certainly has — but I think a little perspective is warranted.
When I sold my 1,600 sf mid-century ranch house in Indian Wells, Ca, and built a three-story home on bluff, that looks over the Intracoastal Waterway to Figure 8 Island, and the Atlantic Ocean beyond, on the NC coast, it had to be one of the best decisions I ever made. There are better States to live in the California, and there are now a whole lot of former Californians that can attest to that.
Renters as well as buyers will do much better than in So Cal if they move to the Midwest. Got out five months ago and best decision I ever made. Have a large one-bedroom with outside deck and indoor/outdoor room in walking distance to downtown in a nice college town, for $400/mo. less than I was paying for a single apt. in the Valley. And the people are nicer too. Yes, there will be winter but in the meantime fall is glorious and I say a snowy holiday season will be beautiful too, stop being so weather-obsessed and get out.
I can’t imagine the opportunity for affordable/reasonable housing prices to be any worse than here in silicon valley/bay area. RE 2.0 is in full swing with houses being bid up as well as sold before hitting market. Walked by a 1,100sq. ranch style on 6,600sq. lot listed for $989,000 – That’s right, you can be the proud owner in what we call the million dollar ghetto. Just a few houses down, the kids are getting high and the dealers come by at least once a day.
I’m pretty sure obama care should be the final nail in the coffin of the middle class (and I don’t say that with political bias). I wouldn’t touch RE here in CA at this point, it’s not only a matter of cost, it’s a matter of value of which there is none. The state will fold under the weight of social programs, taxes and regulation. Personally, we are fortunate that there is good work here, but I don’t see it as a final resting place if you get what I mean.
Silicon Valley, ha! Here in Santa Monica, we have you beat!
Here’s a 794 sq ft house (6,855 sq ft lot) listed at $1,029,000: http://www.realtor.com/realestateandhomes-detail/1781-Bryn-Mawr-Ave_Santa-Monica_CA_90405_M13054-15346?row=13
I luv the charming cinder block retaining wall.
More proof that high home prices are bad for the overall economy and society.
Great comments by everyone, to bad none of you can change things. It’s like living in a prison as an inmate not a security guard. The prisoners can bitch all they want but they will remain locked up. The only wait out is to be released or death, pick your favorite.
While I would welcome a huge reset in CA values, what will make it happen? The last time values feel off a cliff was due to very irresponsible lending practices. That isn’t the case anymore. Prior to that were huge job losses in aerospace, when Clinton slashed defense spending. That could happen again, but when will we finally rein in defense spending?
With Yellen in there with her foot firmly on the Ctrl P button, I can only imagine a weaker dollar, which in turn creates inflation, which in turn keeps hard asset prices high/higher.
For prices to crater again, it will take an event where a large portion of the population no longer has the income to pay their mortgage any longer. What will create that situation?
“What will create that situation?”
Specuvestors not making the rent to cover the dividend payments to the owners of the cash with whom these investment properties were bought. We aren’t Mexico yet and we still have som e semblance of market forces in our economy. The bond market will discipline the FED sooner or later, as will the rising cost of commodities and energy in the face of stagnated and dropping wages. We’ve already reached a top as Cap Rate compression has destroyed investor interest in SFH and Blackstone, AHFR, etc will perform a massive “run for the doors” property dump as soon as the escape opportunity presents itself. Now tell me what floor will be placed under RE then??? The FED will have bigger problems with the imploding stock and credit markets, and with the banks having unloaded a significant amount of their toxic RE the FED will have already done the best for it’s TBTF masters possible.
In Irvine, the chinese are dumping massive amounts of americans dollars into Donald Bren real estate developments. Bren is active in China marketing his developments. It is working like a charm. “Homes” start at $700,000 and go up. All are SOLD OUT, and you have to be on a preferred list to even get a chnace at buying one. I personally watched a busload of chinese being led by a old white lady into the models. They were told they had no chance to buy if they were not on the list.
Of course, with America giving a free VISA to anyone investing in $500,000 worth of real estate, Bren has been paid off rather handsomley for his behind the scenes back door deals and campaign contributions. Eat the rich, when does the revolution start?
For those on the fence…how does it feel now? At least with property, you HAVE something. As soon as they make the currency worthless, then CASH IS KING will be laughable. Hard assets are not a bad idea, especially in light you have to LIVE in one.
Yes it sucks, yes it’s over-valued, yes it’s a mother fooking fool’s game because we are not insiders or bought and sold politicians.
America, Land of the FEE, home of the SCAM.
Interesting to see Trulia waking up to the fact that the “housing recovery” that they were tracking through their site has been abandoned.
They were going on about how we were’t back to “normal” yet and how millennial household formation was going to aid in the recovery.
I have been challenging their cheerleading assumptions with tweets and posts pointing out unemployed millennials living in their parents basements saddled with student loan debt and the rest of the population barely scrapping by cant afford to pay the increasing home prices.
There is no housing recovery and never was one.
The “recovering” economy didnt drive up home prices QE fueled investors did.
Glad to see Trulia dropping their ridiculous recovery index and to provide data that shows that real state of affairs
“CASH IS KING”
I’m sick of seeing this. Unless you make well over $100k a year, and/or have family to shack up with and save money, there is ZERO chance of saving money living in SoCal. With the high COL, extra taxes (like smogging a car), and general expenditures one must endure, yeah right…
If you moved here out of college on your own, there is no chance unless you remain single, have no kids, and grind everyday. But then you’re a loser and a slave.
So tell me, how does one work a regular job, raise a family, AND save to buy? Oh wait you can’t. No wonder people leave CA and only illegals or rich Chinese factory owners come take their place.
Whitey out!
I hesitate to get into racial/social debates, I’m neutral…don’t care about others race/ religion/sex preferences, etc. as long as you’re a decent productive human being/good neighbor I’m fine with everybody.
That being said, I believe the CA middle class (all races) brought many of today’s social issues upon themselves; years in the making. In many families both Mom/Dad went to work to pay bills, keep up lifestyle, many hired illegals to look after the kids. Middle class become too busy/important/lazy to do their own yard work/house cleaning; many hired illegals to do that too. Many middle class teenagers scoffed at the idea of flipping burgers or physical labor/minimum wage jobs so many of these jobs went to…hmmmm? Made in USA became too expensive, cheapest/best values made overseas. Foreign businesses grew wealthy, thrived on America’s seemingly unquenchable thirst for consumables at lowest possible price. And now those dollars are returning to the US in the hands of non-Americans to buy trophy RE. Welcome to the global economy.
Here we are. Populations and financial powers shifting, majorities becoming minorities, politicians wooing future voting blocks. It is what it is, for the good/bad that comes with it, the chickens have come home to roost. It’s a very sad thought, but maybe the middle class did a great job of outsourcing itself.
Swiller, you crazy druid still the same as 10 years ago. I bought in Temecula about 18 months ago and Zillow has my house going from 240k to 345k in that time. I just can’t understand the reason, but I guess i’m fortunate to have gotten in when I did. I make about the same as many above and I just don’t see how people can afford to live in Coastal markets. To live comfortable in these markets you need a household income north of 250k per year in my opinion. The middle class is dead in CA, but I don’t understand with so many people leaving how real estate continues to go up so much. You would think even investors need renters to want to buy real estate so who is renting these places if so many middle class residents are leaving?
CA is for optimists. Good riddance to perpetual complainers. CA doesn’t need you. My first home decades ago was a 418 sqft apt in Manhattan, which now sells for $800k. For RE Bozos, it’s called location, location, location. If all one can afford in a great location is a tiny place, buy it. Sure, there will be ups and downs, but always up in the long run, other some unpredictable physical catastrophe.
Exactly! Kick out all of the rational people in favor of reality ignoring optimism!
I’m 31. I had a chance to buy in 2009, had 10% at the time, didn’t like the house as it was in a different city and folks at my company were being laid off, scary times, so played it safe and didn’t purchase . I was going to buy in late 2011, had almost 20% but decided I’ll make up the down payment difference as I was so close and this home was in my city, so I played by the book, plus I was looking at changing companies, so wanted to switch companies first.
I then switched jobs, by this time I stopped looking for homes, not enough inventory on the market and they looked expensive, so focused on my career. I hear chatter at work that happy days are here again and noticed that home prices are soaring. I figured this can’t last, yet hearing these homeowners brag about their home prices just made me want to throw up as I could’ve, would’ve, should’ve bought and be among their ranks, yet I’m still on the sidelines.
Here I am now, I make six figs, have more than an annual’s salary in the bank. I sacrificed many years saving up and now even with all this you would think buying a home will be a bit more favorable years later when I am doing financially better, it is not. Homes are expensive, all my saving got wiped out in such a short time frame with the rapid price increases.
The only way I’ll buy now is if home prices collapse, I refuse to overpay, call me stubborn and a grouch because that’s what I’ve become when it comes to housing. Owning a home is not for everyone. I now find myself disgusted by the folks you hear talking out loud in public about how they will remodel their kitchen in their home, I feel like an outcast, you don’t see me talking out loud about my salary or savings, in fact if you saw me on the street I’d look like your average lawn maintenance guy, I like to stay humble and quiet.
I wonder sometimes what I would’ve become had I bought at the bottom, I would’ve been on top of the world, but at the expense of becoming a cocky or arrogant person. It all happens for a reason. Good Luck to All.
I’m with ya. I will NEVER overpay again for a property just so I can once again join the ranks as a “homeowner”. Renting is just fine with me.
I rent a seriously nice 3/2 house, 1600sq ft, built in 2006, on a gorgeous quiet street with a decent sized yard, for $1650 a month. Right neighborhood, right school district. I love it. 2 tone paint, nice white blinds, nice flooring. No granite or stainless but I can live without that ok. I can get a 2 bed apartment in my area for about $1300 but I really prefer a house, with kids and a dog and I just like having a little space.
A similar house, exact same floorplan but with hardwood floors and granite, sold around the corner in May for $360,000. Why would I pay $360k and carrying costs of around $2200 a month when I can rent it for $1650 and have no maintenance expenses? It would be financial suicide.
I recently looked at a condo for sale. 3 beds, nice floorplan, only 2 yrs old but needed new paint and carpet – was a bit knocked around. It was in my opinion $100,000 overpriced. The HOA and mello roos were so high the carrying costs were $2300 a month. INSANE. I rent a great house in a better neighborhood for $650 less a month? And I get a yard and quiet street/neighbors.
I am still seeing 70% of all new listings hitting the market for at least 10% OVER the top comp in 2013. I research the listing agents and yep, all the overpriced ones are listed by: in experienced agents. All the “priced to sell” homes are listed by the local, top producing agents.
The market has seriously died around here. Inventory is growing at a crazy pace and multiple price reductions abound. One 3150 sq ft house near me was listed for $699,000. Been on the market 3 mths now and current price is $539,000. Huge price reductions.
I WILL NOT buy until prices drop at least 10% for this year’s highs. And I too earn a good income, have no debt at all, and have a nice down payment saved.
Calgirl, are comparing your rent payment vs. gross housing costs. If so, that’s not a valid comparison. Are you accounting for paying principal and taking advantage of the tax benefits of owning (mortgage interest deduction and property taxes)? Also if houses in your area are built in mid 2000s, there shouldn’t be much maintenance required yet.
Just something to think of…
That’s the thing that sucks. It doesn’t happen for a reason like god teaching a lesson of humility. The lesson is that the fed will force money hoarders (ie savers) to spend or lose value over time. Between the fed and the govt they will kick the can to keep prices artificially high and enable highly leveraged risk takers to win via simple and massive currency devaluation. In their eyes, they are preserving the capitalistic model and bettering our economy, although the long term effects don’t seem sustainable.
My experiences are very similar to your story. 30, 6 figure salary, 100k+ savings had opportunity to overbid before things went crazy. Here in sacramento we’ve had a 25% YoY increase which is plain ridiculous. The wife and I have resolved to only go after distressed properties where there is still potential for sweat equity to balance the BS with prices. I too refuse to lock in a technical loss by biting on something that isn’t worth the asking price. People will challenge you often, but notice they have probably already gotten their investment, so I see those folks as protecting their investing stance and irrelevant to what I need out of a purchase. I’m not just purchasing a home, it’s an investment, liability and a lifestyle…and 30% more expensive in 1 year when you include rates rising.
Quick word of wisdom that I am slowly starting to learn….keeping your money as a down payment is risky with the Feds pledge to devalue currency. Opportunities will come along, but they may not be in real estate for a while. Maybe other investments. Diversification is key at our age and I already feel like I missed a good portion of the current bull market. Like you already found, the fed is really good at forcing you to spend before they make your cash worthless. We’ve decided many months back to shave off 20k for investments and those are looking good so far…not so sure currently though as all equities are BS inflated too.
And yes, current homeowners are fairly arrogant out in public. Just remind them that what our banks and fed have done to bail out housing to keep their house expensive is a form of middle class welfare….They benefitted, but we will all pay…they didn’t work for jack shit, but rather got lucky. Anyone that tells ya otherwise is worth wafting a fart towards. Just don’t become that guy if you do lock in a good deal. We have plenty of ego driven idiots here in Cali.
Anyways, Just wanted to echo your thoughts in searching for your home and let ya know there are many out there experiencing the same. We all want a chance at the American dream so good luck with getting your slice.
you speak as if buying in 2011 would have led to being arrogant. That makes no sense.
2011 was the time to buy. It’s not fair, it’s not reasonable. Earning $30k-$100k in equity for doing nothing is pretty ridiculous, and people who pin roses on their back like they accomplished something is pretty lame
I used to enjoy reading this blog (back in the day when we had our fingers crossed that the ‘inevitable’ crash was around the corner). Now it’s just a load of pessimism. Good to know that I’m not the only one in the hopeless first time buyer boat but that’s about it.
I recently gave up on real estate for the 10th time. It’s a vicious circle and it wears me down. The only places for sale in my price range are looking for cash only offers. If I had those kinds of cash reserves I would be putting a big down payment on a better house! Realtards all act as though they don’t understand how financing determines a home sale more than anything else. They like to get my hopes up only to have one of their lenders give me the bad news that I don’t qualify. When I qualified to buy a house the prices were too high and the competition was fierce. When the prices dropped a little bit I no longer qualified. My landlord would gladly charge me more than a bank would ever allow me to have as a mortgage payment, so I get to enjoy the high cost of living with no tax savings or investment potential for my future. I seem to be caught in that California middle class trap.
I think I’m going to start looking into other places to live.
LA Times estimating the YOY increase of 28% for LA homes. Funny how they are already estimating what 2014 will be like.
http://www.latimes.com/business/money/la-fi-mo-california-home-forecast-20131008,0,3019271.story?track=rss
Talking about the fastest home value appreciation, by the sheer demand of seller, YOY increase of 28% pales in comparison of near $180k increase in a fortnight.
http://www.redfin.com/CA/Irvine/3-Pacific-Crst-92602/home/5859066
No definition of “middle class” I’ve ever seen uses home ownership as a definitive metric – not sure why you are using it here.
People have other things to spend their money on, and even when they can afford a home, they are scared away from the prospect by collapsing bubbles, layoff rumors, etc.
People move more now than they ever have. They work for a shorter period of time at a single job than they ever have. There are dozens of other reasons why renting is increasing.
Our old pal Professor Shiller is getting more public about this housing bubble.
But what does he know? He’s probably just an angry renter.
http://www.reuters.com/article/2013/10/14/us-nobel-economics-idUSBRE99D07F20131014
Doesn’t Shiller own two houses? If he truly wanted to put his money where his mouth is, he would sell both of them and rent and then wait for the big collapse. Despite all his doom and gloom, Shiller realizes that we no longer live in a free market and owning hard assets is a must. You gotta live somewhere and it sure as hell doesn’t hurt that you have the following forces backing you: the Fed, US Government, all sleazy politicians, TBTF banks, Wall St., lobbyists, policy makers, rich foreigners looking for financial safety, etc., etc. etc.
Sure sounds like you’re smarter than he is. I guess they should have made you a Nobel laureate instead of him.
Joe, for all the people who listened to the Nobel laurette for the past few years, where has that gotten them? That’s right, he’s been dead wrong! Just like most of the permabears on this blog. The people who have been correct are those that finally accepted the fact that we forever will live in a rigged market where external powers (aka The Fed) will trump all. I finally accepted reality last year and couldn’t be happier.
Lord, just because the predicted scenario has yet to complete, doesn’t make the predictor wrong. Perhaps the professor will be proven wrong, but I’m not aware that he has committed to a hard date on anything.
Regarding the permabear label – there you go again, categorizing. Why do you do that?
You’re enjoying the house, but here you are.
Joe, after reading numerous posts here, you get jist of the authors. Maybe permabear isn’t the correct categorization, how about angry renters, is that better.
And since this isn’t the “angry renters only blog”, I have every right to participate. I enjoy reading the numerous comments, but I won’t hesitate to weigh in on something if I feel the need to. Have a good night. 🙂
Professor Shiller does own 2 homes. He has his primary residence and a vacation home somewhere. He mentioned this in an tv interview about a year ago. If he bought his homes a couple decades ago, then I am sure he is free and clear. He and any homeowners from decades ago, could care less what has happened during bubble 1 and or what is happening with the makings of bubble 2.
It was a sarcastic remark.
If you are attempting to buy RE in any of the more desireable zip codes in SoCal you are competing against:
1. Lots of international money (mostly Asian – China has 1.3 billion people, the top 5% = over 60 million people, chew on that for awhile)
2. U.S. Regional & National buyers/investors with plenty of dough who want in on Cali;
3. Big local $$$$ – docs, lawyers, high tech, other pros, trust fund kids, on and on;
4. Reduced inventory as Prop 13 old-timers are NOT GOING ANYWHERE;
5. Dual income familes w/2 pros = household income $200K+, they are EVERYWHERE.
6. Use your imagination, many more categories of competition.
Repeat after me, “I am not entitled to own quality CA RE”, say it again please, now one more time with gusto!
If you can’t afford it, join the club, there are plenty of members. No tears, stop whining. It’s a huge country, lots of places with jobs and much cheaper RE, so have at it, why are you restricting yourself to SoCal? If you can’t hang hit the bricks and find a place where you can make it happen.
Stop torturing yourselves over it. And get used to the concept that if (HUGE if) prices drop dramatically in good zip codes, ask why are they dropping, what is the bigger economic picture causing the drop, and what does that mean for your income/job security and ability/cojones to buy?
As for the middle class, good riddance, they had an amazing opportunity to set themselves up but they couldn’t stop spending money, couldn’t stop buying the latest gizmos and junk and leasing cars and my God honey we can’t possibly expect to eat off of a TILE counterop, oh honey my feet just don’t feel right unless we have a hand-scraped hardwood floor, we need another HELOC stat, I said STAT!! I shed no tears for the self-inflicted.
Now get out there and start making some real money, and marry someone who is doing the same, and live a dream life in SoCal. Otherwise, please for God’s sake stop crying and find a place you can afford and live happily ever after. The Universe is not comprised of SoCal.
Amen to that. Great post. However, it is disappointing that our responsible savers like CMO are getting forced out. They are the type of people who were important for stable communities.
We all want to party like it’s 1989.
Completely biased post. If the current prices were supported by anything but the fantasy debt ponzi scheme (which BTW enables many of those Chinese immigrants to enter SoCal RE) you MIGHT have an argument. The facts remain that you have prices that are tied directly to the central planned ponzi scheme that the FED has enabled world wide. It is reliant on not the current debt levels, but ones that ever increase exponentially! In the absence of that the whole Ponzi crumbles taking your “Dual income 200K” and “Rich Chinese Immigrant” households right down with it. If it was in anyway sustainable the FED wouldn’t have let the first bubble pop! They know the end game they are just trying to delay it whilst sparing the banks as much exposure as possible. Why do you think so many of the Chinese upper class are looking to buy abroad? Because they know when the SHTF and the lower and middle class Chinese have nothing to make in their factories as demand for imports from the west dies. They don’t want to be caught up in a workers revolution. We heard all this same BS in 2006 and conditions and the credit markets are exponentially worse! Bernanke rolled a Tech Bubble, a Real Estate Bubble and a Student Loan Bubble into one big economic Nuke. The fallout is likely going to cause systemic changes to standards of living and class division.
But then what would you have to complain and whine about?
“As for the middle class, good riddance, they had an amazing opportunity to set themselves up but they couldn’t stop spending money…”
When was this amazing opportunity of which you speak? You must be referring to pre-1983, which was around the time that median wages started their 30 year stagnation death-march (and probably the last time you could actually buy a home most anywhere in SoCal on a median hh income). Other than being predominately single income, you think those middle class households of the 1950’s 1960’s, 70’s were much different in attitude towards consumerism than the those of the last 30 years? Not so much.
And, can you really blame the middle class of the past 30 years for jobs going overseas, a dysfunctional educational system, health care costs and higher education costs on crack, crony capitalism, ever-growing lobbyist power in D.C. and politics being transformed from by the people for the people to buy the Congress?
Yes, Americans tend not to see the opportunity that’s right in front of their eyes. But, this isn’t anything new.
Let me give a perspective from Chicago. In Chicago prices have gone up since the bottom around 2010. Let me give an example. In a middle class desirable part of the city during the height of the bubble, prices for a three bedroom, two bathroom 1400 square foot house was at like 400K. In 2010 prices hit a bottom of around 150K to 210K. Now prices are back to about 300K. A lot of people are asking prices as if it was back in 2006. Because of the low inventory engineering, some buyers are paying prices from 2006. It boggles my mind to see some people selling their home for the same price during the height of the bubble/frenzy and get that price. Well good for the seller.
I am still renting and very happy. I am paying a very small fraction if I were “owning”. If you look hard enough and have good credit and employment history, you can find a good stable rental with a low price. In Chicago a lot of rental properties are handed down from one generation to the next and their operating cost is a lot less than someone who recently bough a rental property. So the smart landlords charge way below market value for rents and are happy with stable tenants.
The rich from around the world are driving up hosing prices in select markets. This is what happens when property in certain cities becomes a global reserve currency. The property market is no longer just about people making a long-term investment in owning their shelter, but a place for the world’s richest people to park their money.
It’s also happening in cities like central London:
http://www.nytimes.com/2013/10/13/opinion/sunday/londons-great-exodus.ht…
I meant to say in the post above that the rich are driving up housing prices in select cities around the world (not hosing!)
“hosing” also works well in this context …
Sylvia, you were right the first time- -they are HOSING proces…i.e., if you are paying those prices you are getting HOSED. So few people here talk about the costs associated with owning and the risks going forward. Plus being tied down to a house. What if the roof needs re-roofing? No landlord to call. Same for every other part of a house. And the definite possibility of changes to the tax code re: mortgage interest deductions (that has been pushed hard and the NAR may not be able to stop that from happening, try as they may), or changes to Prop. 13 (what a ridiculous idea, capping taxes…it sounds good for the short term, but in the long run, now look at it – -a total mess…not enough revenues to sustain costs of public services). Throw in HOAs which can and generally do increase…Mello-Roos for some people which won’t go away in your lifetime and will make a property harder to sell when you want to move…and the reasons to buy become solely those involving emotions, not sound fiscal decision-making. I have seen too many friends and family ruined by the homes they own, for various reasons. Most of the time because they spent too much given their incomes, hoping that “in the years to come it will be easier to afford” etc. Unless it’s a smoking hot deal, it’s no deal. And there are very, very few of those. And unless you have an inspector who is willing to kill a deal with a realistic inspection, you may be buying a ruinous money pit that will savage you financially and make you feel like a sucker. This latest bubble is for the birds. No chance I buy until the prices go way, way down, and I have plenty of income over six figures, perfect credit, no debt (not one red cent), stable job, and plenty for a 30-40 percent down in a coastal area at today’s prices. Even I am not buying. That should be a warning to those not similarly situated financially. This isn’t pessimism, it’s reality.
I’ve spent a lot of time reading and studying about these issues. The 20 somethings in this thread remind me of when I was 20 something and didn’t understand the real estate cycle and what drives it. I wound up getting off the ladder because of it and losing a bunch of years. Perhaps what follows will save some of you from yourselves. First and foremost, markets are not rational. They are barometers of liquidity as well as of supply and demand. In real estate, liquidity is important but what is more important is population growth (or decline). Real estate cycles generally follow a 14-16 year pattern in CA. You could actually draw circles on a map of any of the large CA metropolitan areas and see each of the 14-16 year rings going back to 1900. If you looked closely you would notice that each ring is approximately a doubling over all the previous rings combined.
Now for the interesting part. If you take the number 70 and divide it by your population growth you will get the time it takes to double. For instance, 5% would give you 14 years. (this is a proven formula that works for anything that has a growth rate) CA has grown steadily around that rate for a long time. Many of you would counter that it has dropped way off in the last few years but not all areas have and I believe the official stats understate the foreign immigration that is occurring by a significant amount. So, the idea you need to visualize is that a 5% population growth rate will double the size of your population in only 14 years. 5% is considered “healthy” growth. Even if it’s only 2 or 3% it doesn’t matter, what matters is that you visualize how CA grows like it does. What this means is that we need twice as many houses as we have every 14-20 years or so depending on fluctuations and the exact area you live in. What this leads to is the 7 up years and 7 down years pattern. We’ve now completed the 7 down years. While its true that many people left, a lot more people arrived from all over the world. They are pent up and waiting just like you.
Have we been building twice as many homes to accommodate them all? Not even close. The only thing that regulates this problem is price. As price climbs supply will find a way to cash in and after a while will over supply and bust again. Population growth will then absorb the excess and it cycles over again. The most important thing you can see is that we don’t live in a static environment. Our population growth is constant and relentless. It never stops. This current leg is VERY unlikely to end with a whimper any time soon as some of you are contemplating. The more likely scenario is that markets figure out how to accommodate all that pent up demand. Another big boom is dead ahead.
I’m not saying this a good thing. We are running out of space and it takes exponentially more resources every time we do this but it’s our current reality. At some point land cost will get so high that all regular business becomes uneconomic and CA will enter a long term decline due to population decline since no one can find a job here. However, we aren’t there yet. Apparently 27 year olds here all make 80k and don’t know what to do with all their cash so I wouldn’t bet against CA real estate just yet. But keep in mind, markets have a habit of remaining irrational longer than you can remain solvent. Do your thing.
IPFreely, very nicely explained.
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