Los Angeles County continues to have the lowest homeownership rate of any large metro area in the country. This is across all data. Los Angeles County has 10 million people while the larger LA-OC MSA includes 13 million since it brings in Orange County. Any way you slice the data, Los Angeles is simply not a friendly place to buy a home and the vast majority of people rent and spend a bank breaking amount per month on rents. There are cracks forming in the system where home sale volume is weak and prices are reaching a short-term apex. What is telling however is that the Great Recession officially ended in the summer of 2009 but the homeownership rate continues to decline for L.A.
The economy and stock market definitely go in cycles. Real estate was largely immune to this up until the late 1990s when creative financing was introduced into this largely boring sector. Aside from pocket bubbles and localized frenzies, real estate was a fairly drab and reliable asset class. That of course has dramatically changed. People forget about cycles and I am consistently reminded of Black Swan events. Over 7,000,000 people lost their homes to foreclosures over the past decade. 1,000,000 of these were in California yet somehow, the nonsensical drumbeat that buying a home is always a good deal is being echoed by house humpers. Back in the last cycle there were investors from Nevada and Arizona and they were simply adamant that no bubble was possible. “These places rent out and cover the loan!â€Â Until local economies got hit. Or they were able to flip in a short period and make a good amount of money. Until prices went down. Some seem to think banking is fantastic again and fail to look at what just happened with Wells Fargo. Yeah, everything is Kosher. That time was different. Yet this time, it is a stable market even when magnificent crap shacks in the Bay Area are going for way above one million dollars. Cycles in real estate are now a thing thanks to the massive debt fueling this machine.
California’s housing affordability is once again in an unreachable level for most working professionals. You get Taco Tuesday baby boomers jawboning their children to purchase a modest home but that turns out to be a rundown crap shack costing $700,000. So many California adults live at home with mom and dad since rents are also high. Redfin put together some data showing that only 17 percent of homes in California are affordable to an average teacher with an annual salary of $73,536. When looking at the data you will see that the coast is becoming an even more expensive enclave and many homes are being bought by investors, foreigner buyers, and dual income households. The last group is the one that is in the position for a large shock since they are buying in many cases to pop out a brood and largely don’t factor in the cost of childcare once the little ones come into the world. But like most things in California, people live on the absolute financial edge and that edge just got much closer.
The last decade has added 10 million renter households. This has happened at the same time that the homeownership rate has fallen to a generational low. Since builders realize that broke Millennials are not going to save the housing market certain markets went into housing mania 2.0. Many people are unable to buy given prices and in many markets home prices are above their pre-market bubble peaks. So with investors and foreigners crowding out the market, we are now left with the current predicament. High home prices and high rents. Rents in many markets seem to be softening. This might be a summer lull or a slight turning point. It is amazing to hear people talk about “stability†but look at this election year! Would you call this predictable? So let us take a look at some rental data.
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