There is a great book called Willpower that examines the ability of people to actually exercise self-control and how these character traits impact life. Those that can delay gratification typically end up doing better in life throughout marriages, work, and their financial decisions. Why this matters for housing especially here in California is most people look at their left and right and are trying to keep up with their neighbors. It is fascinating to see many people trying to cash in on their current equity so they can leverage up to a bigger home because they can. Forget about paying down the mortgage for retirement. Time to press reset and leverage into a bigger home. Since home ownership in California is largely in the domain of older home owners many are simply diving into this property ladder game once again. Retirement figures show that many older Americans are horribly underprepared for retirement. Yet the advice is always to buy as much house as you can get your hands on. Think about the $700,000 starter crap shack here in SoCal. For a 20 percent down payment, a household will need to save up $140,000. Most are into instant gratification and that is why car leases reign supreme in the land of all hat and no cattle. This is the land of Purnia Dog Chow eating baby boomers living in million dollar homes and welcoming back their heavily indebted offspring. The Southwest once again is paving the way to this new recent housing mania. If we look at California, Nevada, and Arizona we find that home values have quickly outpaced underlying economic activity.
While the weather is hot in Southern California, unseasonably so, the housing market has gone lukewarm. People forget that in California, housing needs to be booming or busting in epic fashion. Yet inflection points are harder to detect. People will say “well look at current prices!†Sure, let us look at them. Are you going to buy that crap shack for $700,000? Most of the justification usually revolves around other suckers paying current prices and 2013 as some kind of barometer for years to come but there is no evidence that the trend will continue. For those that enjoy looking at quality homes and I mean this in terms of construction, many have no idea what awaits them when they purchase their glorious little shipping container. And without a doubt, those buying these tiny “starter†homes are simply rubbing their hands just counting the days until they can unload with equity check in hand and start on their property ladder adventure. Some are so narrowly focused that they are missing the macro picture in the state and that is, we have largely become a state of renters. Not because people don’t want to buy, but because most families simply cannot afford to buy. Most households in L.A. County rent. What I am noticing though is quicker turnaround sales hitting the market. And these aren’t necessarily your flipper variety. These are people turning around rather quick. Take a look at these two examples in Pasadena.
The summer selling season has now come to an official close. Not that it had much substance behind it. The sales volume has been wickedly low for all the hoopla being bandied about how great the housing market is doing. Much of the momentum from investor demand has started to wane significantly. At a certain point, the well does run dry and many investors were buying to turn units into rentals so local area incomes absolutely matter especially when prices increase so quickly that they put a damper on cap rates. Many flippers are looking for the next lemming to purchase their pig with lipstick. Crap shacks are selling for $700,000 and we are starting to see that some sellers are hitting a brick wall. Stepping back and looking at the bigger picture however, we find that we have slowly become a nation of renters since the housing bubble first popped back in 2007. Wild financing glossed over the fact that the middle class in the US has been steadily declining. Now that you have to actually show some real income, the numbers don’t look so great especially when you look at mortgage application volume. Census figures also show that we are definitely in a trend of adding more rental households versus people owning their homes. Until the trend reverses, we are seeing many areas become renter hubs.
There is a fine line between using debt wisely and being a slave to crippling loans. Unfortunately most Americans have used debt as a meal replacement for actually saving and are now entering their older years with very little saved. Liquid asset anorexia. It should be telling that purchasing a car, an item that depreciates the instant you set your rear in the leather seat, has some of the easiest financing the world has ever seen. Zero percent loans are common but when you look at the underlying price tag, the cost is actually very high. College loans are given to students with zero income on the future prospect they will generate enough income to carry their loans. Not a big deal when you take on $5,000 a year but what about $40,000 a year? As we are seeing, many young adults are having to move back home with mom and dad as grown adults merely to pay their bills, many times in car loans and student debt. A similar phenomenon has occurred in housing where base cost is very high thanks to cheap financing. Low rate mortgages still cannot force demand if people are unable to service the debt. That is the problem we now confront today. It isn’t a question of the raw number in population growth. If for every doctor or engineer we create 10 to 20 McJobs, then where will the housing growth be? Homes are unaffordable even in the face of record low mortgage rates.
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