There has been a very strong trend of shifting from homeownership to renting over the last decade. This is a dramatic reversal from the peak reached in the 2000s where homeownership reached a historical apex. Sure, this was brought on by making up income, taking on massive leverage for the biggest purchase of your life, and pretending the middle class was not shrinking but it was fun to act as if everyone was rich right? Clearly that is not the case and we now find the homeownership rate of today is now back to where it was 20 years ago. Baby boomers overall are not pleased that their kids are now part of a hyper competitive market and many of their offspring are now back living at home rocking out in their rooms with Nirvana and Pearl Jam posters. They’ll need to make some room for the younger kids as well since many of these are coming back home to their Britney Spears inspired rooms. People are still itching to buy but their incomes simply cannot support those $700,000 crap shacks. This is the large reason for why sales are down and inventory is up. The assumption is that many of these younger households are slowly going to pop out of their parent’s home and makeup a new part of the buying pool. So far the data does not show that to be the case and you would expect that to be happening right now since technically, we’ve been out of recession since the summer of 2009. The US is in a massive renter nation trend.
Big investors have been a critical component to the housing market going back to 2008. Over the last few years, we have seen the smalltime ragtag mom and pop investor creep back into the market trying to make money on flips. Of course as the deals run thin and appreciation slows down as it has, it becomes more difficult to turn a profit. It seems like big money investors have already received the memo and have started pulling away from the housing market. As expected, this has put a wet blanket on the mania from 2013 where bidding wars were common and begging sellers for mercy was typical. Inventory has picked up, bidding wars have started to wane, and sales volume remains incredibly low. This is a big point to focus on. Lending standards at the moment are fair and look at actual household incomes. This is good. However, given the housing lust nature of California buyers and sellers, why is sales volume so anemic? Take a trip to your local bank and they’ll throw money at you. Even ARM usage is picking up to stretch your budget. Of course sales volume is low because locals do not have the cash or income to support current home prices without the giant support of uncle cash buyer. Of course you have areas were foreign money flows in but this money is not blind and unlimited. If it were, don’t you think sales volume would be off the charts for the state? Inventory is there. What is happening is big investors overall are pulling back and this does have an impact on the housing market.
It is safe to say that the momentum of 2013 has fizzled out in the housing market. Sales are down and prices are reaching a plateau. Part of this has come from the slowdown of investors purchasing homes in the state. An interesting end of the year study by the California Association of Realtors (CAR) found that 82 percent of investors that bought in 2013 had the intention of turning the home into a rental. The other 18 percent were giving the old flipper lottery a try. This helps to explain why inventory continues to remain lowbecause in more typical markets, a person selling the home would usually also buy another home in the ragtime favorite trend of property laddering your way into a bigger home. In other words, two transactions with one move. Today, you have many investors buying foreclosures from banks with a one and done deal (buy the home from bank and then put it on the market for rent). Yet from contacts in the housing industry, the lack of first time home buyers is dramatic. In 2013 the argument was that pent up demand for young buyers was going to give housing another dramatic run higher. In reality, 2013 gave us a massive run from investors and with them slowly pulling back, the market is already entering into a tipping point. Flippers buy for appreciation so what happens when prices stagnant or turn lower which is typical in these boom and bust cycles? In reality, first time buyers are absent because they can’t afford to buy in California.     Â
As it turns out, investor buying does have a massive impact on local real estate. Big money is slowly starting to pull away from the real estate market. We are seeing this in dramatic fashion in Arizona and Nevada. It is also happening here in the sunny Golden State. What is interesting in the last housing correction is that prices and sales fell on the outskirts first and slowly made their way inward. The marginal buyer is pushed out first before making its way up the economic food chain. We are seeing similar action happening in places like the Inland Empire and Central Valley where inventory is certainly up and prices are hitting plateaus. The momentum from 2013 is now running on fumes. We also have certain cities being dominated by investors and in many cases money is coming directly from China. Hot money is finding a home in the oddest of places. Yet one thing is certain and that is SoCal real estate is now entering into an inflection point. As this turn unfolds we are going to find out what areas are truly prime and what other areas are all hat with no cattle.
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