We are creatures of habit and suffer from historical financial amnesia. As you would expect, the market is now turning and the question now shifts to how big of a correction we are expecting. Los Angeles has been in a decade long renting trend where the vast majority of new household formation has come in the form of renters. I understand that many people on this blog either own or want to own but the reality is, many people are voting with their wallets and rent because prices are simply too high. So it comes as no surprise now that sales are slumping and inventory is slowly picking up. The housing market in Los Angeles is up 181 percent since 2000 while the CPI is up 50 percent in this similar period. When you look at history, there is really no pattern as to how the market will respond and the reality is people do lose money in real estate which for many decades was something you were unable to utter.
It was only a matter of time before inventory started hitting the market and unsold homes started to pile up. Not that home sales ever saw big volume increases but given the low inventory, any normal amount of homes sales pushed home values into the stratosphere. So here we are with unsold housing inventory now hitting 6-year highs. The problem of course is affordability causing a decade long shift for households into renting. The Southern California News Group came out with 36,923 listings in the four-county region which amounted to a 22 percent year-over-year increase. Housing markets are slow to shift and this bull market is getting close to celebrating a decade of moving up. The troubling sign is that real estate is now in a boom and bust cycle and with rates still near historical lows, there is little ammunition from the Fed should things go south.
There is now a concerted attack on Prop 13 as people with two ounces of common sense realize that no, grandma isn’t being kicked out onto the streets because property taxes are going through the roof. In fact, there is now evidence highlighting what we all knew and that is Prop 13 is a gift to the “I got mine so screw you†generation. For example, the majority of people that inherit Prop 13 homes essentially use them as rental homes or second residences. The issue with this system is that say you buy a crap shack in San Francisco today, it is very likely that you will pay 5, 7, or even 10+ times the amount in property taxes as your neighbors. No one likes taxes. And what is odd is that states like Texas, a state that no one can argue is “liberal†has some of the highest property taxes in the country. People selectively choose which taxes they like and don’t like. Prop 13 sucks when you don’t own but then if you do buy, your incentive is to keep the rate as low as possible. And then you have the incredibly high cost of construction in California. So of course builders are only focused on high-end homes or rentals where they can make their money back.
Real estate cycles turn as slowly as a massive cruise ship. Unlike the stock market where a stock like Facebook can fall 20 percent overnight, real estate tends to boom and bust at a much slower rate. There is an odd logic to the current market. “We bought a few years ago and look how late to the game you are!â€Â Then when asked if some would buy today, “no, but it can only go up!â€Â Coming from an investor mindset, if housing values are priced in a good range you should buy, just like you would buy an undervalued stock. When you are spending $1 million on a crap shack, you need to do some serious due diligence. It is odd that house humpers always use the “but you can’t treat your home like an investment†line and then talk about how reasonable it is to pay for an absurd amount for a property in a subpar neighborhood with underperforming schools. Then they compare real estate to stocks! Of course it was a matter of time where the market would hit a bump and here we are. Even Robert Shiller hints at this being a turning point.
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