As the year comes to a close, it is useful to put things into perspective. Sure, California has a love affair with real estate and we go through our traditional booms and busts. $700,000 crap shacks now litter the landscape but there are fewer and fewer lemmings taking the plunge. In Canada there was no correction. In fact, households continue to go into deep debt to purchase real estate. The argument goes that mortgage standards are much tighter in Canada so therefore, they are much more enlightened when it comes to financing homes. People forget that the bulk of the 7,000,000 foreclosures in the US came in the form of standard loans. Garbage loans imploded in more dramatic fashion but people lost their homes because the economy shifted. At that point, it merely meant covering the monthly nut. We were housing dependent and that market contracted aggressively. Canada is housing and oil dependent. And oil just got a big kick to the shins.
If you bought or rented in 2014 a larger portion of your income went to housing. Rents and housing values are quickly outpacing any pathetic gains to be had with wages. With the stock market at a peak, talking heads are surprised when the public is still largely negative on the economy. Can it be that many younger adults are living at home or wages are stagnant? It can also be that our housing market is still largely operated as some feudal operation. Many lucrative deals were done with big banks and generous offers circumventing accounting rules. This works because many perceive they are temporarily embarrassed Trumps, only one flip away from being a millionaire. Why punish financial crimes when you will likely need those laws to protect your gains once you join the club? The radio talk shows are all trying to convince people to over leverage and buy a home because you know, this time is the last time ever to buy. Yet home sales are pathetic because people don’t have the wages to support current prices. So sales drop and many sellers pull properties off the market. You want to play, you have to pay today. Rents are also rising and this is where a large portion of household growth has occurred. 2015 will continue to see housing consume a large portion of income and will lead many into a new modern day serfdom.
The latest sales figures for California show a market that is hitting a stalemate. Sales are dropping and many sellers have pulled properties off the market hoping that spring will bring better days. People run 30 year projections of perfect stability but think of what has happened in California only in the last 15 years. We had the boom, bust, and boom of the tech sector. We had the boom, bust, and boom of housing again. Do people think that the 1,000,000 completed foreclosures occurred to people that wanted to lose their homes? Don’t you think they wanted to believe in the buy and hold forever mantra? What is rarely mentioned is that most lost their homes with standard mortgages, not your toxic junk. Why? Because the economy hit a recession (and a rather significant one). The issue of course is that you need to maintain cash flow for a long duration. Given the current mindset in the market, it is interesting to see what people perceive as a good deal. We’ve seen homes the size of closets hitting the market as some sort of starter home for those on cash strapped budgets. Today we highlight one of the smallest homes we have seen out in Highland Park.
Apparently home buyers didn’t get the memo about buying California real estate. November home sales tumbled to their lowest November showing dating back to 2007. When real estate markets turn, you will always see sales volume dry up first before any price changes. We are already seeing marginal areas throwing out some properties with lower prices. The drop in sales volume was to be expected given that investors are largely pulling away from California and regular families simply do not have the income to support current prices. If buying real estate was a no brainer you would expect that sales volume would be running at a healthy clip. It isn’t. In fact, this was the slowest November going back to 2007. Not a lot of good things were happening in 2007 but sales were dropping year-over-year yet year-over-year home prices were up.
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