You might think that the Bay Area is home to the most inflated real estate in the US but being “over priced†is also relative to local area incomes. The army of tech professionals in the Bay Area earning healthy household incomes is expansive. Sure, having a household earning $150,000 a year might make it tight to purchase a $1 million crap shack but that is the situation. So it should come as no surprise that in the land of “All Hat and no Cattle†that we have the most overpriced real estate. According to a report by Trulia the most overpriced areas come in as Austin (Texas), Orange County, and Los Angeles. Why? Incomes are detached from the rise of home prices. Of course in some areas foreign money and investors with deep pockets have pushed prices to stratospheric levels. In many parts of the US home prices are within reasonable ranges thanks to the Fed’s ridiculously low interest rate fury road policy. Yet Millennials are not buying in mass because many are deep in debt and incomes are just not keeping up with home prices. If home prices are overvalued, how much are they overvalued by? If everyone thought home prices were within reason there really wouldn’t be all this interest and analysis on the subject.
I’ve lovingly called the new movement of people leasing homes as Rental Armageddon. A truly first world problem between buying an inflated crap shack or having to rent a property. God forbid you have to lease a place. People quickly lose perspective and that is largely one of the reasons we oscillate between booms and busts in real estate. But the data is very clear and that is, we are in a deep renting trend. We’ve added 10 million renter households in the last decade while being net neutral on adding homeowner households. That is a big deal. The housing market is also facing some massive demographic headwinds. Younger buyers are cash strapped and home builders realize this (this is why home building is lagging the mania because builders realize the demand is for rentals, even higher cost places). Also, you have Taco Tuesday baby boomers entering the twilight of their lives and they certainly won’t be upgrading their properties. A recent study by the Urban Institute sheds some light on this renting trend. There are some serious demographic and economic headwinds favoring the renting trend. One key finding is that for the next 15 years, rental household formation is going to outpace homeownership formation. Let us see where things stand today.
In the last few months I’ve noticed a few more emails coming through regarding transitional areas and the value that is blindly being missed out. A few of the emails in all seriousness pointed out that a Starbucks and new shopping center have sprung out of the ground like a palm tree and hence, a six-figure price appreciation is now worth it. Forget about the lower incomes in these markets or the quality of schools or the fact that families are packing in tightly like sardines just to make rents. Somehow, the fog of gentrification is taking hold of every market equally. Yet the only people I see even remotely thinking about buying in these markets are investors and that is to rent out. There are deals to be found for those willing to take on the vanguard of gentrification. One such area is Compton. Every week I get updates on properties that are priced at non-L.A. levels. Let us take a look at what we can find in the market today. We might even find something that is up your alley.
One thing to understand about California housing is that boom and busts are central to the market. It is fascinating from a psychological standpoint that today, many think that California housing is a simple and safe bet. Casually, they forget the massive destruction that occurred only a few years ago and the echoes of the impact are still around: low inventory, massive Federal Reserve intervention, and a shift to investors buying homes. Looking to buy? Gear up for a sizable down payment and maximum leverage on a low interest rate. Also, it is easy to forget that 1,000,000+ Californians lost their homes via foreclosure and many today are still underwater even with the recent boom in home prices. Even with the trend to higher prices, people have the choice to buy or rent. Unlike stocks, most households have to make the analysis of buying or renting. In spite of rising prices and the meme that home values will only go up, the homeownership rate in California has plummeted. The state is seeing a wave of households opting to rent. This trend started in 2005, while home prices held a plateau up until 2007. In housing, trends reverse slowly. Take a look at 30 years of housing data for the LA/OC markets.
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