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.
There is an interesting “wealthy gentrification†of many neighborhoods in California.  I’ve seen prime spots in places like Pasadena slowly evolve into upper-class professional enclaves while “old school†owners live modestly watching their new neighbors pull into their driveways with Range Rovers and BMWs.  They live in million dollar homes but their bank statements would tell you otherwise.  There is a large contingent of California homeowners that have what I call the golden handcuffs of real estate.  They are cash poor and equity rich.  That is, if they are willing to sell and move away from the more expensive market they can cash in their lottery ticket.  Many will not.  This trend is part of the stripping away of the middle class in California.  People seemed shocked by the money flowing in from overseas but just look around your house, car, and other items that you own.  It is very likely that they are global in nature.  So when you have buyers from Asia buying up real estate in San Marino or Irvine with suitcases of money, it is no mystery.  All of this is to say that many baby boomers are likely going to be tied down to their real estate.  Those that want to keep up with their neighbors can simply tap into their property via a reverse mortgage and live up the dream.  Is this smart?  Of course not.  Yet most think they are real estate experts because they’ve watched HGTV or some flipping show.  Is this low inventory environment a temporary situation or is it here to stay?
Last month only 7 percent of homes sold in SoCal fell in the foreclosure resale category, a 7 year low. This is a big trend change in the market as investors continue to be a big player in the real estate market while distress sales drop dramatically. What is interesting from the data is that the typical mortgage payment for those buying with a mortgage is still very low signifying income pressures. There is little doubt that SoCal is in a real estate fever. That fever may be drawing back a bit with inventory rising and prices getting out of reach for many but the investor play is still sucking up a lot of new inventory that hits the market. It might be useful to compare current housing data to figures reached during the peak of the market. How far have we come and where do we go from here?
The recovery in real estate has largely gone to big institutional players. Â Recent data from the US Commerce Department shows that rental income grew the fastest compared to other asset classes since 2009. Â Of course as we have chronicled over the last few years, most of the distressed property buying has gone to the investor class. Â The gains in rental income only impact a small portion of the population but the growth has been astounding. Â Rental income is now up 85 percent since 2009. Â Even stock dividends up at 44 percent have not met the pace of change in rental income. Â The trend is reflective of the insatiable demand from Wall Street for rental property over the last few years. Â Right on time however is the small investor jumping in at a tipping point as inventories rise, big money slows down, and interest rates have an impact on the housing market. Â Some big funds are even selling into momentum.
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