Time to slap on some new paint, lay down some hardwood floors, and haul in some granite countertops because it is time to convert that funky apartment building into a condo project. Los Angeles and San Francisco are seeing a rise in apartment to condo conversions as the market is ripe for the picking. Given the massive amount of investor buying many first time buyers with a deep desire to own are now opting for condos simply because they are being out-bid on single family properties. Condo prices are surging yet many do not realize that condos come with added costs like HOA monthly dues for example. The prices of condos in markets like Pasadena and Irvine are once again reaching levels last seen in the peak of the housing bubble. So it is no surprise that some are running the numbers and are being tempted to turn that apartment complex into a condo project. The wild prices are back and we’ll head to Pasadena for this article.
There was an odd sort of myth floating around the market that the cash buyer crowd was somehow a tiny portion of the market, like a drop of water in the vast ocean of home buying. This delusional dream played into the fantasy that this housing market was naturally rising because of overall household demand when in reality, it is being driven by investors leveraging the artificial low rates created by the Fed. The flood of money from Wall Street has been large. Even anecdotally, it was apparent that cash buyers were driving the market given that housing is a margin driven market. That is, at any given time only a small portion of all homes are on the market for sale. However, an analysis by non-other than Goldman Sachs shows that 60 percent of all 2013 home sales are being driven by cash buyers. That is, the middle class is largely being pushed out of this game and has become the minority in this real estate market. Let us look into the data more carefully.
Las Vegas is a fascinating case study of a market that can boom, then bust, and then boom again all within the timeframe of one decade. It is telling that for the first time in history we are living in a global real estate market where booms and busts follow one another like a giant game of telephone. We seem to rise and fall together. Of course this makes sense since there is one major player largely behind the financing of this system in the US. Easy money is flowing like the Amazon and visions of quick wealth in real estate pepper the mainstream press. Flippers are back with a vengeance and investors have become the market in many areas. Las Vegas is one of those specific locations. The share of all cash buyers is stunning and even more astounding is the resiliency from this group sustaining multiple years of all cash buying. Many came for the rents while now many are staying for the flips.
The California housing market is providing us with two different pictures. First, home prices have surged and inventory is still very low (although increasing from the spring low). However, the homeownership rate continues to decline from the peak reached in 2006 of 60.2 percent. Today the California homeownership rate is 54.5 percent. How big of a difference is this? Since 2007 California has added a net of 500,000 renter households while losing a net of 233,000 homeowners. Yet the market continues to boom in the face of a declining homeownership rate. As we look at the market today we start seeing a slowdown in the speed in which flips are being accepted and inventory is rising. With higher interest rates and the fall season just before us, will the market thaw or continue to accelerate?
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