If you had to write two chapters on the housing market between say 2000 and 2007 and one between 2007 and 2014 both would look incredibly different. One was guided by massive exuberance and a populist movement of giving money to anyone with a pulse. The latest chapter is one guided by big investors and low inventory. This long horizon now brings us to the present. Housing values are up solidly over the last year but not because the general public is diving in head first. This latest push came from a multi-year trend of “cash buying†and investor dominance. That trend has slowed. In order to get more interest again, the Federal Housing Finance Agency (FHFA) is looking at making it easier for the public to get loans. Ignore the fact that this agency has been rebranded since it failed fantastically in the last bubble and is now once again in charge of overseeing Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks.  Since many in the public can’t muster 5 percent for a down payment or have blemishes on their credit, the FHFA is looking at making things a tad bit easier for people to qualify. Instead of asking why so many have a hard time saving for a down payment or why people have lower credit scores, the banking/government hybrid is looking at making it easier for people to take on big debt with high leverage.
There was an odd sort of rejoicing last week in the midst of market volatility. Housing starts jumped but the people pointing at this failed to grasp that a large reason for this was because of multi-family housing starts. In other words, the demand is reflecting a nation that is becoming a renter class. This trend reflects a new workforce that has more part-time employment and less job security than the previous generation. Why would you buy a home if your employment is more volatile? The numbers are clear and we have added over 7 million renter households in the last 10 years. Right now we are at the peak of renting households. However, we peaked for homeownership back in 2006. Since 2006, we’ve actually lost about 2 million net homeowner households. No need to worry since Wall Street has taken up the slack to purchase those single family homes and convert them back into rentals for the new modern day serfs. The renting trend continues and the jump in housing starts reflects a change in home buying perception.
I love the antiquated notion that most people buy their homes to live in forever. To setup roots. But the underlying reality is very different. Most people stay in their home for 7 to 10 years. In places like California, a first home purchase is considered a “starter†home until you property ladder your way up to your dream home. We recently noted that Los Angeles and Orange County are the most overpriced rental markets based on local wages and employment prospects. People live beyond their means to different degrees. So it is no surprise that recent home equity line of credit (HELOC) data shows that HELOCs surged 21 percent year-over-year. Not at all surprising, HELOCs for the Los Angeles and Orange County metro areas jumped 55 percent. We barely have one manic year of prices and all of sudden homeowners are ready to tap out their equity. Setting roots? More like leveraging your way into a life built on debt that crumbles once the next recession hits.
People have a hard time understanding that low interest rates in today’s market are largely a reflection of a negative outlook on the economy. Central banks around the world are more concerned about financial assets and the secondary impact on real estate is just that, secondary. The market took a beating last week and you get people saying “hey, at least rates will be low for that $700,000 crap shack!â€Â This is the kind of isolated California logic that puts people into a bubble regarding macro trends. It is also the same kind of reasoning that caught so many people off guard during the last crisis. We recently noted that the L.A./O.C. rental market is the most overvalued in the nation. Why? Because local incomes don’t justify current prices hence the 2013 mania brought on by outside money forces (i.e., domestic investors, foreign money, etc). That money pulled back this year. Now you have locals blowing through wads of cash and all it means is people consume a large portion of their pay to live the SoCal lifestyle. A fake it until you make it approach supported by debt. We see this trend permeate into small homes in select zip codes as people go haywire just to get in even if the home is not exactly a “player†home. Today we take a trip to Culver City.
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