There once was a time that California provided ample opportunity for middle class families. While this might be the case in some small areas, the statistics show us that it is increasingly more difficult for middle class families to get by in the state. The massive amount of investor buying is merely a sympton of a growing disparity hitting many parts of the country. Money has been devalued due to massive levels of debt and big investors would rather have tangible assets versus holding onto cash. This is a big reason that for the last few years investors have aggressively deployed money into the housing market where in 2013, half of all sales are coming from “cash†buyers. While the economy appears to be improving it is clearly not a uniform recovery. If you use the stock market and home values as a barometer you would think everything is going great. Yet that is not really the case especially if you are middle class. Let us take a look at a few signs that highlight the continuing challenges for middle class families in California.
Investor demand for housing is largely responsible for the feeding frenzy in real estate over the last couple of years. Yet this unrelenting demand is unsustainable and it looks like cracks are forming in the investor trade. First, the median price paid by those using “cash†financing has reached an all-time peak. Not a revisit of an old peak but a brand new one. Of course this is happening while the typical US household has seen stagnant wage growth. Most understand this yet manias lure people in at the most inopportune times. A few other pieces of evidence are highlighting a tipping point in the market. Inventory is starting to increase and new home sales remain incredibly anemic. The refinancing boom is now being shuttered because of rising rates (as if a 30-year mortgage going for 4.6% is somehow apocalyptic). The investor trade is crowded and we’ve seen data showing how large the investor share of the market is in 2013.
It is no secret that Wall Street has been a big player in this current real estate run. The two biggest single-family landlords in this game are Blackstone Group LP’s Invitation Homes followed by California based American Homes 4 Rent (AH4R). The interesting thing about AH4R is that they own about 20,000 properties throughout the country where investors have been diving in head first. AH4R recently announced a $14 million loss and was also reported to be laying off people because of the recent loss. This is an interesting case study coming from the second largest single-family landlord in the country. It is also interesting to dig through the financials since it shows us that some are overplaying the rental game. Property management is an intensive business. Any investor with time in the business realizes that having one or two bad tenants can set you years back in regards to profits. The gross rents must look extremely appealing to those new to the game. Some are quickly going to realize that they may have overestimated their potential profits.
This week we were welcomed by the news that existing home sales reached a multi-year high. Good news right? Depends on where you stand since the stock market continued to react to the potential of the Fed moving slowly away from their unprecedented mortgage experiment. As you know, mortgage rates are now at a multi-year high as well. It is very clear that this has hampered the ability of your average family to purchase a property since the big money from hedge funds and investors is still fiercely competing for the current inventory in the market. Big trends do not change overnight. Yet it is clear that we reached an inventory bottom in March of 2013. It is also clear that cash buyers are a much bigger portion of our market today (in fact, they might be the biggest player of all). The real estate game has completely shifted from a stale boring play that tracked inflation to a boom and bust cycle that is fully dependent on the wills of the Fed. If that is the case, the Fed pulling back even a little is enormous. The nation is becoming one of more renters largely because low rates have done very little to help out regular families. The big winners of course are the large investors. So let us look at the paradox of the current market.
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