The Case Shiller Index is one of the better long-term measures of housing price changes. It looks at repeat home sales so you know what you are tracking versus say an area where new home sales are jacking prices up while old crap shack stucco boxes lag the market. The Taco Tuesday crowd is obsessed with buying simply because they lack other investment options. Housing may or may not be a good deal. Housing in many areas of SoCal is absurdly overpriced. However, in many parts of the country it is a good (to great) deal. Yet all markets are not created equal. In the last month, Chicago was the worst performing housing market even edging out Detroit. Chicago is a good city but my lord do they have a political system that is fully twisted. Taxes in Chicago are nutty and the pension system has mega problems. Bottom line, buying a home in Chicago is risky given all of these long-term issues. And the market is taking notice. Let us look at the short-term best and worst performers.
The high cost of housing has bigger consequences than simply seeing $700,000 crap shacks littering the landscape. People are spending large portions of their money on rents and also mortgage payments. Los Angeles leads the way in both of these categories. The typical renter in Los Angeles spends nearly 50 percent of their income on paying the rent. We are number one in this category. The typical home buyer is spending roughly 40 percent of their income on mortgage payments. We are in the top 3 in this category (San Francisco leads the way). Of course many people can’t keep up. Alternatives include the 2.3 million adults living at home with parents. The other option is leaving the state to places like Texas. And for others, you simply fall through the gentrification cracks. Los Angeles leads the nation with the highest homeless population. The problem is only getting worse. Since 2013 as home values went up, the sheer number of people living on the streets has increased by 10 percent. The mayor even declared a state of emergency and announced a $100 million plan for dealing with the problem. That is a drop in the bucket unfortunately. The housing crisis has wider problems than merely overpriced stucco boxes.
It didn’t take long for the minor dip in the stock market to reflect in real estate trends. Month-over-month sales volume fell by 13 percent. August sales volume in California was very low resembling the volume of sales seen in 2008 and 2009. What followed was a dip in 2010. The pattern is typical in California real estate since we have converted the market into a speculative roller coaster causing renter households to shoot up while people see their income sucked into the housing vortex. House lusting buyers are seeing a slowdown in real estate and are balking at current prices. They want to see continued double-digit gains even though household income is stagnant. The slowdown is also being driven by big investors pulling away from the market. What you have left is a smaller group of buyers buying at inflated values using maximum leverage and flippers still thinking they can squeeze out double-digit gains. The tide is now shifting.
When I made the claim that Los Angeles is the most unaffordable place in the nation to rent a few people shouted out by saying that San Francisco and New York were more expensive. Of course, these people didn’t bother to look at the data or understand what being unaffordable means. What it means is that based on household incomes in Los Angeles and current rents, people spend a larger portion of their income on housing. This is why Los Angeles is undergoing a rental Armageddon. The cheerleader brigade simply thinks that because rents have risen that somehow this equates to buying. But here is the thing; most can’t buy and sales volume reflects that. In fact, many young households are relegated to living with mom and dad because they don’t even have the means to pay the rent let alone buy. The trend is clear in Los Angeles: higher home prices, higher rents, more young adults living at home, and those that do buy spend a massive amount of their income on the mortgage. Take your pick in this speculative market. What is apparent is that many households in Los Angeles are living on the razor’s edge of financial insolvency.
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