The most widely used measure for inflation is the Consumer Price Index (CPI) put out by the Bureau of Labor and Statistics (BLS). Nearly a decade ago I discussed how poorly a job the CPI did in measuring home price increases while they were happening. In fact, during the raging housing bubble the CPI only measured moderate increases in home prices. Why? The measurement looks at something called the owners’ equivalent of rent (OER) that essentially considers what your home would rent for versus your actual housing payment. So you could be paying $3,000 in a mortgage, taxes, and insurance but the actual rent would be something like $2,000. That is a massive differential. In the LA/OC market, this measurement did a horrible job. The argument of course is that rents eventually catch up and we are seeing some of that now. Yet Fed policy and other government decisions are made on the basis of the CPI and miss big changes by years. The latest CPI report is now showing this inflation creeping in but of course, it is late once again. And this is important to address because the largest component of the CPI is housing costs.
Housing inventory continues to remain tight across the United States. It would seem logical that home builders would be taking the plunge to build homes for future buyers. But that is a bet that is looking into the future. Builders continue to bet with their budgets that the United States is deep in a rental trend. Keep in mind that new home prices are going up steadily. Yet the push up is coming on lower volume and higher priced homes going to a smaller portion of the population. Investors are largely not interested in new homes with higher premium prices. They are largely focused on discounted prices from existing home sales. The big investors are largely out of the real estate play. Going back to every recovery from the 1960s, new home sales typically take off once the recession is officially over. This recession officially ended in the summer of 2009, nearly six years ago and still there is no sign that new home sales are leading this recovery.
One of the biggest reasons why people “need†to buy a home is to expand their family. And when I say expand, I mean having a baby. It is always interesting to see the carefully planned budgets but in many cases, daycare costs are not factored in or how much additional costs a new mouth to feed will be. And one baby is just the start. Why is this important? Because people choose to enter into major life changing events simultaneously. That is, taking on the purchase of a home and starting a family. I bring this up because I get many e-mails from people saying “my spouse wants a baby and our apartment/rental is too small so we need to buy.â€Â Yet for the most part, we get calculations based on two incomes and these don’t factor in the big cost of daycare for many. For example, in a place like Pasadena daycare can cost you $1,400 a month. That is a nice chunk of change. The LA/OC market is already incredibly unaffordable. In San Francisco it would take the typical family 35 years just to save for a 20 percent down payment. That is why the typical family is getting pushed out of these markets.
There was a story that I read recently about a man living in Venice that rented out his apartment and then lived at his office for 500 days. Why? Because the rent is too damn high! The LA/OC mega-metro area is now ranked as having the highest rents relative to what the locals make. So it was no surprise to find out that someone took the next logical step of renting out their Venice apartment and simply camping out at work to save up some cash. This is of course is an extreme measure but there are countless others having to double and triple up with roommates just to get by. The idea that somehow sky high housing costs are good for the economy is a misnomer. All that happens is more money is sucked into the real estate sector. Housing is shelter at a basic level whether you own or rent. Even for those that own, you have to sell to unleash that hidden equity. And as many Taco Tuesday baby boomers are finding out, many won’t sell because their adult kids are moving back in with big student debt and are having a tough time affording local market rents, let alone venturing out to buy a $700,000 crap shack. There has been a massive disparity in home price increases over the last 10 years in Los Angeles and mapping this out is really fascinating.
Subscribe to feed
