It is very true that most people are only focused on the monthly payment. Most in California inflate their lifestyle up to their paychecks. That is why you have many older people now looking into the long path of retirement with little in savings. They expected to live like millionaires but realize that their housing equity doesn’t send them a check each month. It is also hard to live like royalty when the adult kids are back home in their rooms. I’ve heard it said incorrectly a few times so I thought I would go into the total cost of owning a home more clearly. Someone said “if I pay $700,000 for a home that is all I will ever pay whereas in rent it is never ending.â€Â First, there are never ending costs associated with a home including taxes, insurance, and maintenance. Second, there is a little thing called “interest†and this is so vital, that it makes banks the rulers of the world. Let us first dive into the cost of owning a home first.
Whenever you read dry economic articles on housing that attempt to justify high home prices there is always the fascinating lack of pictures. As they say, a picture is worth a 1,000 words and in the case of a crap shack, a picture is worth a thousand tacos. Some people are getting out of Dodge (or Compton) and trying to sell into the larger gentrification meme. I went to a few lower priced neighborhoods this past month to see if any deals were present. The one thing that struck me is the increasing growth of cars per house. It was already high before but the number this time blew me away. It would appear that 4, 5, or even 6 cars per household were common in these areas. The congestion on the street reminded me of New York parking absent the skyscrapers. You also have the standard car stationed on the lawn on a few homes on the block. Keep in mind these were in so-called hipster hoods where one Whole Foods was enough to justify a $700,000 crap shack. Ultimately inventory is rising and people are slowly coming to their senses. I’m always stunned that some feel they missed out on buying a crap shack. So buy today. If your plan is to stay put for 30 years, why are you trying to time the market? This is speculation and you might as well speculate with the stock market. Just to give you a taste of the craziness, let us go in search of some of the smallest homes available for sale today in Los Angeles.
One of the memes that continues to spew out of the mouth of the Taco Tuesday crowd is that owning a home is the ultimate goal in life because that is how they grew up. You buy a home that stretches your budget to the extreme, work on the beer belly during the weekends, and slave away for 30 years hoping no curve ball comes during that time. And you wonder why mobile Millennials are saying “no way†to that vision. They also assume the past is going to reflect the future. Even in San Francisco with a well educated tech crowd, many are going down the renting path because owning a home is financially insane. What many fail to factor in is that California’s population is going to become much more wrinkly and old while our younger workforce is getting paid much less in inflation adjusted terms. So it should come as no shock that 2.3 million grown adults are now living back home with mom and dad. We also have a roommate trend where people crowd into homes like sardines to split the rent. In many gentrifying hipster zip codes the neighborhood looks like a car lot because of the number of people living in one house. If we are throwing labels around like the “war on drugs†then there is a war on the middle class in California.
There has been a strong growth in renting households over the last five year. Even home builder optimism and permits are perking up but a large push is coming from builders putting up multi-unit properties. In other words, rentals. For most Americans with a positive net worth, most of it is tied up in their real estate equity. Consider a home a forced savings account (you have to sell to unlock that equity). But as the low interest rate environment swept the nation, big banks and investors decided to try their luck in being landlords.  After all, you just had 10 million people lose their homes to foreclosure and they will need to live somewhere. Like a simple math equation, we’ve also gained 10 million renter households in the last decade. Yet this trend is continuing even in the face of our six-year recovery. You are seeing in China how quickly psychology can turn. The real estate market in China has slowed down considerably so people were plowing money into the stock market where valuations were ridiculous. The market in China has lost close to $3 trillion in market cap recently. So much for prices only go up. And of course if this is more than a tiny trend and a real correction, some of the hot money from Asia may start slowing down as when the Nikkei imploded. These are outside forces and for most Americans, renting is becoming the economic choice.
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