There were two housing stories that stood out to me today. One shows the pure absurdity of housing in California, in particular Northern California. As we’ve discussed before a home is expensive or affordable only as measured by incomes in the local area. Well for Palo Alto, it looks like having a salary of $250,000 per year could qualify you for subsidized housing. Of course having this income puts you in the top 2 percent of all U.S. households but in Palo Alto you might as well be eating Purina Dog Chow with a nice class of Manischewitz. The Bay Area is running on hot money from the tech industry. Another story focuses on the continuing rental revolution we are undergoing. In Q3 of 2015 100,000 apartments came online, the most since the late 1980s. And most were rented within 12 months. I think these stories really highlight the larger theme in housing – extreme money for hot enclaves and renting for the vast majority. The middle is being cleaned out like using a melon baller on a cantaloupe.
People are surprised to hear that Los Angeles County is the most unaffordable location in the entire United States when it comes to renting. Isn’t San Francisco or New York more expensive? Of course they are but affordability is based on income and Los Angeles has a much lower household income base to draw from. Unlike creative mortgage financing, you actually need to pay your rent out of your net income each month. What has happened since the housing bubble popped is that more families in Los Angeles are now renters and rents have soared causing a rental Armageddon in the area. Families are being squeezed in what I would like to call housing purgatory. They have no way of buying an inflated crap shack but at the same time are unable to do anything about rising rents. For those with Taco Tuesday baby boomer parents, many Millennials are opting to move back home. And builders realize this trend is only going to continue and that is why builders are going after multi-unit permits at a much higher rate than single family permits. Los Angeles County is now becoming a renter’s paradise assuming you like cramped living areas, high traffic, and sky high rents. I don’t see permits for new freeways coming online at the rate of multi-unit permits.
You want to know why homebuilders are still reluctant to build even though real estate prices are up? The first reason is the demand in housing is coming for rental properties and building in multi-unit housing is up. Good assessment on that one builders. The other reason is that high priced metro areas are seeing Millennials move in with mom and dad. What is interesting is that the group leading the charge in new household formation is seniors. Yes, older folks are driving the creation of new households but this may not be what will sustain a long-term healthy market. After all, it is unlikely that a 75-year old is going to be buying a crap shack with a 30-year mortgage. What was interesting is that in 2015 net household formation came in at the lowest rate in a generation only behind the epic disaster year of 2008. So what does this mean for housing overall?
The housing market is overheating and you can sense it when you speak to house humping enthusiast. The housing market can do no wrong and a correction isn’t even in the realm of possibility according to their views. But even recently, the National Association of Realtors recognized reality when they stated the obvious: rising home prices with no rise in household incomes is not good. This is why in California we are facing rental Armageddon. People are now desperate to buy and are getting all kinds of odd mortgages including those that come with zero percent down basically shifting a large part of the risk to the lender. These mortgages only make sense if you believe housing will never go down. Many Millennials are still struggling to buy given their weak income growth. Today we’ll take a look at a home in Culver City and see how far $1 million will take us.
Subscribe to feed
