The California housing market ended 2015 just like the stock market. Losing momentum and looking overpriced. In California a runoff of tech wealth has flooded into areas like San Francisco driving prices into the stratosphere. People now seem to feel that real estate is untouchable and that the Fed somehow cares about some crap shack in SoCal. The Fed has bigger fish to fry. Foreign money has pushed prices up in certain cities but this money can be fickle. Will this money continue to flow in? The housing market in California looks due for a correction simply based on underlying fundamentals. Most of the arguments for prices remaining high across the region seem myopically focused on the notion that foreigners and investors are somehow dumb when valuing assets. I’ve spoken with a handful of investors, both local and from abroad and they are keenly focused on value. There are a few challenges facing the California housing market and it is safe to say that things will limp along into 2016.
There is no doubt that San Francisco is in a deep housing mania. When you take a look at the junk you can buy with $1 million you realize something is amiss. Bubbles are hard to assess when you are in them. You have continuing momentum pushing prices higher and the constant rhetoric that “this time is different†although history tends to serve as a better guide. But San Francisco is in another dimension. The median home price is now $1.25 million and the typical condo is selling for $1.1 million. You have tech professionals earning good money struggling to afford basic rundown rentals. All of this is being spurred by hot money in the tech sector and foreign money flooding the market. In a place like San Francisco even a professional couple with a solid down payment will have a tough time competing with all cash offers over asking price. As we noted, last month we saw a large portion of the market being taken over by all cash offers yet again as regular buyers are priced out. San Francisco is now more unaffordable than at the peak of the last bubble.
Blame it on too much paperwork. The house humping cheerleaders are blaming the drop in sales volume on too much paperwork instead of the true underlying culprit. The real reason that sales collapsed was that prices are largely becoming unaffordable to most families. In virtually every part of California home prices are out of reach for families without them diving into massive mortgage debt for a piece of crap stucco box. Taco Tuesday baby boomers of course would like home prices to remain inflated but now they are getting a taste of economic karma when their boomerang kids move back home as adults. An indication of this insanity in California is based on the volume of investors buying homes. Last month 30 percent of home purchases went to all cash buyers. This was the highest amount going back to 2012. However, sales volume took a big dive. In other words, a large portion of those that can buy are investors. Is this trend sustainable?
The house humping pundits lock into anecdotal evidence and ignore larger changes in the housing market. For example, many kept harping on the fact that the Fed would never raise interest rates. Well here we are, with the first rate increase in many years. Many also claimed we were going to have a flood of Millennials buying homes but that also never materialized. The only thing they are focused on is price and that is being driven by big money, foreign investors, and people stretching their budgets to the max making their wallets burst at the seams. The housing calculus overall is not good for most Americans. We have gained nearly 9 million rental households since 2005, the largest 10-year increase in history. At the same time, we have 8 million people that lost their home through foreclosure since 2004. Of these foreclosures 1 million happened in California, the perpetually sunny state. This seems to go against the notion that buying at any price makes sense. The reality is, we are undergoing a major rental revolution across the United States and a comprehensive Harvard study arrives at the same conclusion.
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