The financial system is gearing up for providing maximum leverage to those willing to take the dive and purchase a crap shack. Low down payment loans are now making their way back into the system and the machinery of credit is flowing nicely. I’m sure many of you are in the same boat and if you happen to have decent credit (meaning no bankruptcy or foreclosure since the bar is low), then your mailbox is being flooded with credit card offers and advertisements to buy a new car or to take on another credit card. The last time volume was this high was back in 2005 and 2006. Now I’m seeing ads coming in regarding low down payment products and also interest only loans. Yet when we look at the actual details, the trend has been dramatic in leaning in favor of renting. But not because this is some trending sensation. No. Household incomes simply do not justify current prices. However, inject risky loans again and the game can go on further. We are seeing weakness in the market in the form of low sales volume. Virtually all major counties in California have seen a dramatic drop in homeownership in favor of renting. We’ll look at the county level data but also take a stroll down to Huntington Park for some real estate deals.
I love when mortgage products get creative in their titles. We had those wonderful “option ARMs†that basically gave you the option to not pay your mortgage principal. But what people forget beyond the egregious toxic mortgages, most foreclosures hit people with vanilla 30-year fixed mortgages. That is right, of the 7,000,000+ completed foreclosures most were boring traditional mortgages. Since the stock market has been on a massive run for six years now, people have forgotten that recessions routinely hit our economy. It is part of the economic system. If you can’t pay your mortgage, it doesn’t matter if you have a 30-year fixed, ARM, interest only loan, or other variety of payment you are making to the bank. Now that banks know they can boot you out and sell to an investor, the foreclosure process started humming along. A reader pointed out that Freddie Mac is entering once again into offering low down payment loans to cash strapped borrowers dreaming of their first crap shack. The product is called Home Possible Advantage but in reality, you are making a big bet with little equity.
People rarely think about the cost of living and how it impacts their long-term economic future. The Bay Area may seem expensive but incomes in the area do justify some higher prices (maybe not to current levels but that is how the market responds). That is why, the LA/OC region is the most unaffordable in the nation because incomes simply do not justify current prices. It has caused the LA market to enter into rental Armageddon where people are packing in like sardines just to afford the rent. You also have millions of full grown adults living at home because they can’t afford the rent, let alone purchase a renovated crap shack of their own. In reality, what has happened since the housing bust hit is that more disposable income is going directly into housing. When we look at household incomes, we find that for most of those in the LA area they have moved back in time while home prices have moved up. Part of the move has come from big investor demand. And with housing, momentum is huge. However, with appreciation slowing and investors pulling back, where does the momentum go? There is good data on income and income matters especially in the LA market where most people rent.
There are major ramifications for the rental revolution that is occurring. Some people think that living in cramped quarters is perfectly fine but common sense will tell you otherwise. Both UCLA and the University of North Carolina at Chapel Hill researchers have found that living in crowded homes is not ideal. Children from crowded home have poorer health, carry worse scores in both math and reading tests, and exhibit more behavioral problems even when taking poverty into account. Yet all of these hipsters moving into crap shacks somehow think that living in a 500 square foot closet is awesome because a taco joint opened around the corner. A taco with salsa is not going to compensate for your kid attending a poor performing school. It is one thing when poverty forces you to live in a certain area. It is another thing when you are paying $500,000 and living in an unsafe and crowded neighborhood just so you can get “in†on the market. It is hard to believe but Southern California is now home to some of the most crowded zip codes in the nation.
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