The rent is too damn high in the Bay Area. I’m sure many families in the Bay Area utter this on a monthly basis as they send their rental checks to their landlords. The median rent in the Bay Area hit $3,200 in the first quarter of this year. The booming tech industry has been a big win for Northern California real estate although for many, it may not feel that way. Investors have been a dominant force as well in Northern California. Investors have been dominating the US housing market for nearly half a decade and are now only starting to show some signs of pulling back. San Francisco is an interesting case study of an area undergoing rapid ultra-wealthy gentrification. The median home price in San Francisco hit $1,000,000. On a monthly basis I will get e-mails from tech workers talking about their two income households being unable to buy in the Bay Area. Interestingly enough San Francisco makes Southern California look like a bargain. What you are also seeing is a deep hollowing out of the middle class in the US but it is incredibly visible in places like San Francisco.
In many markets, investors were purchasing properties to rent out for a short period of time before they had any intention of selling. Many of the large investors have hinted at buying places and holding them for 5 to 7 years before selling them off. Since big money entered the market in 2008, we are already seeing that phase one is being completed and big money is certainly exiting the market. The impact of course is what you would expect. Take a look at Arizona for example. In the Greater Phoenix Area, cash buying now makes up “only†24.8 percent of all sales. This is the first time since 2008 that it has fallen under the 30 percent range. And what has happened because of this? Inventory has shot through the roof increasing 35 percent year-over-year. Because real estate trends move like molasses, the next phase will likely include pressure on prices (which we are already seeing). The Arizona market was hyper obsessed with big investors. As those investors pullback it is no surprise that inventory is shooting up. Yet the psychology of the market is always lagging because prices peak when inventory and sales are changing and this tends to be a better leading indicator. Arizona is an excellent example of a market where investors are now pulling away.
The low turnover in housing is having some organizations changing their tune regarding the current boom in home values. After all, places like the National Association of Realtors (NAR) will be better off with higher sales volume and lower prices versus very low sales volume and higher prices. As we see investors pulling back, the already low volume is dropping even further in what is typically the house lustful months of the summer. In virtually any three month period over the last 60+ years you would typically see the number of homeowners far outpace the growth in renter households. That trend has reversed since the housing bubble popped. For example, over the last 3 months the number of renting households went up by 312,000 while the number of homeowners went up by 54,000. The trend to becoming a renter nation continues. The NAR actually is echoing a similar tune to what we are seeing and that is many young households are income strapped and many are living at home and will first go out and rent before buying a home. So this trend is likely to continue. Rents are heavily dependent on local incomes and jobs. We’ve had a solid run since 2009 in regards to the stock market and things are looking a little bit frothy at this point if we look at price-to-earnings ratios and also overall sentiment. So what changes when we add over 7 million renter households over the last decade?
It is amazing to see the resurgence of housing flipping and rehab centered shows on cable TV. The shows glamorize the lifestyle of flipping forgetting how many people got burned in the previous downturn. Of course, many of the juicy flips already went to other investors and now many in the public are itching to get back into the game. Flipping works on a larger scale when the market is appreciating quickly. Why else would you assume the risk? In slow to declining markets, flippers are relegated to finding beaten down places and having to control costs carefully. You need a team and multiple flips per year to make it lucrative. From watching these shows, costs get out of control very fast and many seem to have a poor grasp of short-term gains and the bite taxes will have on their profits. There also seems to be a “mom flipping†trend. God bless cable television and the creative ways to promote real estate!
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