Rental Armageddon continues for California and other expensive metro areas around the country. There now seems to be a consensus that home prices can’t fall and that somehow, the Fed or government will step in no matter what happens. This seems to be odd logic since the Fed didn’t step in during 2007 through 2009 before the market got smashed. Of course in the minds of Californians six years ago might as well be ancient history and the 1,000,000+ Californians that lost their home to foreclosure recently are just like the suckers that lost out during the Gold Rush. The argument for home prices being high usually revolves around the following: the Fed is stuck in low rates forever, inventory is low, foreign money is infinite, your monthly payment is about the same as rent (as long as you make a giant six-figure down payment), local household incomes mean squat. That last point is the most important at least in the long-term. Rents are also a function of how healthy the economy is. Affordability in California is hovering near record lows so it is no surprise that many more households have converted to renters.
The airwaves are now once again blessed with the non-stop talk that accompanies a typical California housing fever. We are in the presence of a powerful headwind with low inventory and cheap money sloshing around the system. There was a story talking about the backlash being leveled on people renting out their Santa Monica homes via AirBnB. The story sounded like our typical Taco Tuesday baby boomer that hit the real estate lottery and is now cashing in on some nice rental cash flow. The issue? Other locals don’t enjoying paying for million dollar crap shacks and living as if they were next to a hotel. People want the Leave it to Beaver neighborhood with a Keeping up with the Kardashians price tag. As usual, people in California want it both ways. The story was interesting because it tried to paint the older person as cash strapped when in fact, they were sitting on an equity goldmine but alas, they would have to sell to unlock that equity. Instead, they would rather rent their Santa Monica pad, cash in some large rental checks, and use the proceeds to shop at Whole Foods and enjoy those delicious Taco Tuesdays. Welcome to the People’s Republic of Santa Monica.
I ran into a successful Millennial couple this month and we had a good discussion about housing. They are in their 30s and still do not have any kids. Both are career driven and ultimately would like to buy a home. They have the money to buy but just don’t want to. What they brought up was interesting and they mentioned some of their peers had to resort to moving back in with mom and dad. What they brought up simply reflects a “new normal†for Millennials and that is many are simply not eager to purchase a home. Many are delaying marriage, have smaller families (if any), and a large number are carrying sizable student debt. All of this has caused a low demand for housing and alternative choices to buying a home especially for this cohort of Americans. In California we have a high number of adults living at home largely because of the cost of rents and home prices. Yet this trend encompasses the entire country. Higher home prices and rents have only exacerbated this movement.
The story of 2015 continues to be one of a stalemate for the SoCal housing market. Prices in some areas are near or even higher from the previous peak. Yet inventory remains low and for many, prices are still beyond their reach. Investors are still a big dominating force in the market. Flippers are out in full force trying to squeeze out profits in every corner of the market. It is always amusing when you hear about people “missing†the market. First, this tends to come from folks who don’t see themselves as speculators. Yet somehow, they feel that they missed the boat on the big equity jump we have seen in the last few years. However, to unlock that equity would mean leaving said area. In other words, you could have easily speculated and bought Apple stock on margin as well. You are simply timing the market. There is nothing wrong with that but please don’t try to position yourself as a non-speculator. What about the 7,000,000+ people that lost their homes to foreclosure? We usually don’t hear from those once they enter a financial grave. Call it selection bias. Just because you live in your speculation vehicle doesn’t mean anything new. Culver City is a prime spot for house lusting shoppers. Zillow has 41 homes listed for sale. What is also interesting is that the city has 33 pending foreclosures. There is no incentive to rush these out to market. Low inventory, low interest rates, and a high number of house lusting buyers and you got yourself a nice speculative market.
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