Housing values in the U.S. have reached a new peak. In total, U.S. homes are valued around $31.8 trillion according to Zillow. That is 1.5 times the GDP of the U.S. and close to three times the GDP of China. Crap shacks in Los Angeles are now worth $2.7 trillion, which is more than the United Kingdom’s GDP. What is very telling is that real estate values across the country in virtually every large metro area are near peak values. In places like San Francisco, they are in a new stratosphere. The allure of real estate is now fully engulfing the nation and flipping rates are at decade highs. People want to get a piece of the action. You also have many ex-pats now taking their money abroad and retiring in more affordable countries where they can stretch those Taco Tuesday dollars while money from China is flowing the other way and boosting prices in some areas dramatically.
San Francisco housing has entered into a new reality. Tech money and foreign cash continues to flood the market and pushing prices to astronomical levels. The typical San Francisco crap shack now will cost you $1.42 million, a new record high with condos going for $1.15 million. The city is entering into escape velocity of gentrification. You have older Taco Tuesday baby boomers with rudimentary tech knowledge that bought decades ago living next to a new generation of wealth and tech savvy professionals. You see this as well in Los Angeles. Some real estate “experts†barely have a working understanding of tech but definitely know how to navigate to Zillow to view their inflated prices. San Francisco is such an odd case study. A city that outwardly states it supports the poor but when you look at prices even making $100,000 a year makes you part of a new high income poor – at that income level a sizable amount of your net income is going to go to simply paying for housing unless you want to be part of the mega commuting culture that is now emerging in California. What is going on in San Francisco?
While indicators of the economy seem to be doing well, the homeownership rate in California is telling a different story. The unemployment rate looks healthy, the stock market is still very high even with the recent correction, and people seem to be spending beyond their means once again with credit card debt solidly above $1 trillion. Euphoria is oozing out of Taco Tuesday baby boomer beer guts and the saliva is dripping when they pull up their Zestimates on Zillow. Yet somehow, the homeownership rate remains stagnant. Millennials are living at home in record numbers especially in California. The recovery started in 2009 almost a decade ago yet people aren’t out buying homes in droves (yet inventory is pathetically low). The future of California will be with rentals.
The housing market continues to operate in a very lean environment. Home builders are building but are focusing their efforts on multi-family units to cater to a growing renting population. Builders are also shy about placing big bets given the recent memory of the previous housing bubble. Places where they can build freely like Arizona, Nevada, and Florida are known to pop as quickly as they go up in value. And in areas like California, where NIMBYism rules the day, people are now convinced that prices will never go down so the ratio of bulls to bears is extremely high. The sentiment seems to be that there could be no wrong in purchasing real estate even if it means leveraging up into a crap shack. Yet what is very telling is that inventory is still very low after many years.
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