Middle class families in California have faced many challenges over the last few decades. One of those challenges has been the rollercoaster movement of the housing market. What is clear from many readers of this blog is that many are seeking to buy or rent in mid-tier to upper-tier markets. Yet in these markets, even a $100,000 household income is going to put a pinch to a bottom line once housing is factored in. It is also the case that people keep redefining metrics. For example, the middle class by definition is the split between one half of society and the other based on income. The median household income in California is $57,287. By this definition, your typical family simply cannot afford to buy a home in many markets. Yet this isn’t a problem when one out of every three homes is being bought with all cash money from investors, many not even from the state. It should also be no surprise that the homeownership rate in the state continues to decline. Is the middle class dream an illusion in California?
FHA insured loans stepped in to take up a lot of the slack when other low down payment loans exited the market in 2007. FHA insured loans are still a low down payment option requiring only 3.5 percent down but at least with these loans, some level of due diligence is done when looking at potential borrowers. Yet over the last few years, FHA insured loans have gone from a tiny piece of the housing market to now being up over $1.1 trillion in loan guarantees outstanding. The housing market is now becoming largely bimodal with all cash buyers picking up better properties while those with barely any down payment funds opt to go the FHA route. Given how expensive FHA loans have become, it is apparent that a large portion of the population doesn’t even have enough to enter the housing market without 30x leverage. Changes are also coming to FHA insured loans that will make them more expensive in a few months. Why are these loans getting more expensive when the housing market is supposedly robust?
The housing market continues to face a few trends in 2013. Low inventory, higher leverage because of low interest rates, and high demand from investors. Take for example the share of foreclosure re-sale properties that are being sold. In Southern California, the peak was reached in 2009 at 58.3 percent of all sales. Today foreclosure re-sales make up only 15 percent of all sales. This of course is one reason why the median home price has soared in the last year. With such high demand and low inventory, investors are able to poach high quality properties since coming in with an all cash position is much better than relying on a mortgage which most typical buyers will use. Also, the shadow inventory is being slowly leaked out since there is little reason to flood the market and depress prices. Banks have figured out that frenzied buying and record breaking low inventory is a good recipe for causing prices to jump up. Does distressed inventory even matter in Los Angeles anymore?
Most people have a hard time with regular math problems, let alone complicated financial instruments like derivatives. So to think that most people are following the movements of the Fed and basing buying decision on this is somewhat unrealistic.  The rush to buy homes today is driven by a different set of factors from the previous mania yet the psychology is the same. Underlying the motivation of many is a fear of missing out on higher prices and jumping in because the time is right. The comments in the last article highlighted many people that recently bought and their motivations. They run the spectrum and are truly valuable. It also discussed many that are actively seeking to buy and how they are encountering manic like behavior from current buyers. There is an insatiable demand for rentals from investors and big money is targeting prime markets. You would think that with all this rage, home sales would be solidly up. In fact, California home sales are down 3 percent on a year-over-year basis for the last month of data. When we look at US purchase loan originations we find the volume and amount being pushed out to be at levels last seen in the 1990s. What gives?
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