Big investors and hedge funds have largely left the building when it comes to investing in residential real estate. They started in 2014 and largely made a full exit in 2015. Today you have a bunch of aspirational house humpers trying to make their money on the edge of a frothy housing market. Flippers are flipping and families are overextending. While the tech sector hits a snag, you have the median priced house in San Francisco selling for $1.2 million. Many Millennials, the next large group of potential house buyers, are unable to buy because they are simply broke. They are living with parents as grown adults or have become one of the 10,000,000 new renter households over the last decade. With low rates, commercial banks have seen little need to beef up their lending. In fact, big banks are not growing their mortgage lending operations. Struck by low margins and new regulations (that should have been there in the first place), many non-commercial banks are taking up the slack. Now you can get a mortgage while sitting on the can or going zero down up to $2 million. What can possibly go wrong?
The New American Dream is renting. At least that is what it looks like if we track the homeownership rate over the last decade. Millennials are moving into their prime house lusting age yet somehow, a flood of buying is simply not happening. Renting continues to dominate the recent trend of household formation. It was interesting to see that out of the top 10 metro areas for renters, 6 of them reside here in California. It is becoming increasingly difficult for Millennials to purchase homes in high priced areas. This is simply an observation and the facts back this up. Also, Millennials are unlikely to be in any position to purchase high priced crap shacks. In high priced markets, new home construction is simply a tiny blip on the radar. There are now new products out in the market like the PoppyLoan that try to capitalize on the low down payment crowd. What has become clear is that California is now trending towards renterville.
I was up in the Bay Area in the fall and people love talking about real estate just as much as they like talking about the latest startup. Housing values in the Bay Area make Southern California look affordable. The median price for a sold home in San Francisco is $1.2 million. And the market still seems to have momentum. A lot of money that has flowed into San Francisco has come from foreign investors but also wealthy tech households. Tech has been on fire since the last housing bust. While some people want to believe tech and Bay Area housing are decoupled, there is evidence that there is a deep connection between the two. Rents certainly adjust based on market forces. Depending on how deep the correction, there is likely to be an impact on housing. They always say a financial bubble is only visible once it is popped but there are clear signs when you are in one. Let us look at some figures here.
We are definitely into housing bubble territory. The latest California affordability figures show that only 29 percent of families can actually buy a home at today’s prices. This is why we are seeing products like the PoppyLoan coming about in the Bay Area trying to bring back the nothing down days of the last bubble. You also have companies promoting their “one-click†mortgages as if taking on $800,000 in debt for a piece of junk in San Francisco is a decision that should be made similar to liking a friend’s video on Facebook of a cat dressed up as a banker. The number of young adults living at home continues to stay at a record high. Of course this is being driven by affordability and more to the point that people simply do not have the incomes to justify current prices. The PoppyLoan in San Francisco, the hub of high income workers, actually states that this loan was made because people had a tough time saving enough for a down payment. That should tell you a lot. So let us look at the latest affordability figures.
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