Since 2009 all cash buyers have purchased roughly one third of all Southern California home sales. This is a significant number and unlike the early 2000s, many of these buyers are looking to hold onto properties as rentals. A good portion of buying has come from larger hedge funds and an increase of foreign money has caused competition on an already low selection of homes to become more pronounced. The latest inventory report for California is telling in many ways. Many of the larger metro areas in California are seeing annual inventory drops of 50 to 70 percent. Those looking to buy are facing added competition from a variety of unlikely sources. Last year in February we set a record with the number of homes sold to absentee buyers (29.9 percent). Where is all the inventory going in California?
This may come as a surprise to many but the United States did not lead the charge in regards to creating the biggest housing bubble. I was trying to find a time in history where the world experienced correlated housing bubbles and could not find a time similar to the one we are living in when it comes to real estate. The reason for this is central banking policy around the world is very similar. Think of the Federal Reserve, European Central Bank, and Bank of Japan. There is interesting data highlighting the magnitude of global housing bubbles that actually makes US home prices look modest. One of the biggest challenges I see right now is when people use large area data (i.e., US, county, etc) and then transfer this to a small area that is clearly facing a mania. There are many areas that are seeing home prices now selling for 8 to 10 times the typical household income of those in the area (the US is now at a solid 3 to 3.5). So let us examine those global housing bubbles first.
One of the best measures we currently have for tracking real home price changes is the Case Shiller Index. The reason this measure is one of the best is that it examines real changes on repeat home sales. So you are really measuring the real price change for the same property, or as close to it as you can. The median price can show massive price movements down or up given what period of a boom or bust we are in. The median price is useful in more stable housing markets but for over a decade we have had anything but that. It is important to understand the difference in these measures because we are now seeing a large usage of the median home price in the press and this in turn creates a self-fulfilling prophecy. The same can be said when bubbles burst. I want to explore the Case Shiller closer for the Los Angeles market over the last few decades to track these changes and spot where we are in the current cycle.
When the Japanese housing bubble burst in 1990 the economy was left in disarray. Hard to believe that this happened 23 years ago but real estate prices in Japan are now at levels last seen in 1983. In other words, thirty years of virtually no real growth in real estate values. In a system conditioned by inflation this is a perfect example of asset deflation.   Many simply assume that real estate appreciation is going to happen one way or another but we are now following a low rate policy similar to what the Bank of Japan did with quantitative easing. 2012 is not a good example to set a baseline for a trend because interest rates were pushed down heavily by the Fed and inventory continues to be held off creating a low level of supply on the market. Yet when we look at what Americans can afford on a monthly basis, it is virtually locked because household incomes have been stagnant for well over a decade. The Japanese asset boom and bust provides many parallels to what we should expect in the US. Many point to 2012 as some sort of divergence but this is more a reflection of aggressive quantitative easing and low inventory more than a sustainable boom because of solid economic and wage growth.
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