There tends to be this myopic view in California regarding the housing market. People forget the relatively young history of the housing market and the trials and tribulations associated with owing a property. Many people also suffer a dramatic case of confirmation bias to justify their house lusting ways. It might make paying that mortgage on the $700,000 crap shack much more palatable. In expensive places like California, the market has spoken and people are largely shifting to renting properties. The numbers are abundantly clear despite the house humping rhetoric for those trying to jack up the housing cheerleading. The cheerleading is getting incredibly loud with zero down mortgage in the Bay Area and with the Super Bowl ad showing us that you can get a mortgage with the “click of a button†like buying a café latte at Starbucks. Sounds reasonable to me that you are making the biggest purchase of your life over your iPhone in one second. But this speaks to the financial amnesia where people just want to get into markets at their peaks and are fully driven by emotion. So let us look at the pros and cons of buying versus renting.
The rise in rents and home prices is adding additional pressure to the bottom line of most California families. Home prices have been rising steadily for a few years largely driven by low inventory, little construction thanks to NIMBYism, and foreign money flowing into certain markets. But even areas that don’t have foreign demand are seeing prices jump all the while household incomes are stagnant. Yet that growth has hit a wall in 2016, largely because of financial turmoil. We’ve seen a big jump in the financial markets from 2009. Those big investor bets on real estate are paying off as rents continue to move up. For a place like California where net homeownership has fallen in the last decade, a growing list of new renter households is a good thing so long as you own a rental. The problem of course is that household incomes are not moving up and more money is being siphoned off into an unproductive asset class, a house. Let us look at the changing dynamics in California households.
The Taco Tuesday house humping brigade is having a tougher time denying that we are in another bubble. Sure, they keep pointing to prices going up and rents surging but what about stagnant household incomes or the stock market getting kicked between the legs? According to these delusional Kool-Aid drinkers, everyone is saving money and is perched on the fence ready to bounce on that piece of crap real estate that was built during the Great Depression. “But we don’t have no down payment loans!â€Â Of course much of the move in prices over the last few years came from investors, foreign and domestic, that drove prices into the stratosphere. In the Bay Area, with the typical home selling for $1.2 million, even high income tech households are unable to buy. And you really have a double bubble. Easy venture capital money is trying to find those next mystical unicorns (i.e, Twitter, Facebook, SnapChat, etc) but this is another symptom of hot money trying to find a home. All of this growth is predicated on prices only going up. With households broke, a new product called a Poppyloan is here to save the day bringing back the zero down option. What could possibly go wrong?
Millennials as a group defined by an age range, are one of the largest cohorts of people right alongside baby boomers. Millennials have already reached their prime house humping age range but somehow, the homeownership rate in this category is not moving. The thought was that Millennials would soak up all the excess demand and continue to push prices upwards. In reality, what has kept prices up is artificially low interest rates, investors buying, and a low supply of property out in the market. Many Millennials are forced to rent or to live at home with their parents well into adulthood. Controlling biology has worked out nicely that new households tend to be smaller so many adults can just move back into their childhood room and have tasty tacos with their parents. The end result is that the housing market is moving for many different reasons beyond household formation. In fact, major household formation has come in the form of rentals since the Great Recession ended. Let us look at the latest data impacting Millennials.
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