Making money during the first housing bubble was virtually fool proof. And even if you were a fool, you had plenty of do-it-yourself television shows to hand hold your way into real estate riches. You were dumb not to participate. If the working stiffs in America live in households were $50,000 is the typical income, having your California home “appreciate†by $50,000 or more per year simply by the magic of house lusting, then owning a home seemed like a no-brainer. Flipping was so rampant that it became comical and in many cases work was shoddy since it was done in haste and the quality was slightly better than your first grader’s Popsicle house. In many hipster markets it is safe to say that every other house has some influence from the cable television home beautification shows. Over the last few years, flippers have been capturing some nice gains as glassy eyed home buyers are willing to pay any price for a drywall shack with one pooper just to say that they got a piece of the American Dream. There was some good money to be had selling into the herd mentality in 2013. The average San Francisco flip in 2013 brought in a gross profit of $194,000. Sure beats working a 9-to-5. Apparently working is once again delegated to the realm of the suckers.
If you want to play in the current housing market, you have to contend with the limited amount of inventory and the delusional salivating sellers going for peak prices. It is interesting to hear about recent home buyers e-mailing me about foundation issues, roofing problems, and generally crappy construction issues after they bought their homes. A few waived contingencies just to get their lusting home buying urges out of the way. Now they are left with major repairs and a 30 year mortgage. No one that moves into a home will suddenly find a hidden gem of cash flow. To the contrary, even if you pay off your property you still have taxes, insurance, and maintenance. That is why we see these Friskies eating baby boomers selling their homes with mega-deferred maintenance asking insane prices but with very poor upkeep. You have to sell to unlock that lottery ticket. It is also interesting to hear the Chief Economist of the CAR hint at some California homes being overpriced. Even this tiny realization should tell you something. Remember folks, real estate agents make better money in a market with a large number of sales instead of a market fully stunted by funny accounting and banking chicanery. Yet we are starring at an inflection point here. Housing markets turn slowly. It is abundantly clear that local household incomes are being stretched to the limit and many are now relying on ARMs and other products that simply manipulate the monthly payment.
Apparently very few people need mortgages to purchase homes in the market today. One out of every three homes sold (at least those on the MLS) are going to those “all cash†buyers. Investors continue to dominate the percentage of all sales but the total number of sales is actually pathetically weak given the rise in prices. You would expect that somewhere in the rush to purchase regular buyers were the engine of this price increase. They are not. Even builders are not tempted to go out and build. Why build? For the younger broke generations living at home because of the weak economy? In California we have 2.3 million adults living at home. These people live at home because even a rental is out of reach let alone a $700,000 box with walls that are so thin, you can poke your finger through the crappy drywall and waive high to your other massively indebted neighbor. Looking at mortgage application data, it seems that people are simply not applying for loans. This is why in this housing “recovery†I’m not hearing the constant glee from mortgage brokers and real estate agents. Sales volume is low and mortgages are for the plebs in the streets trying to squeeze into these overpriced homes. Who needs a mortgage? Apparently traditional buyers but they are hard to find in this market. Even in high priced California, sales fell in May to 37,734 from 37,988 in April. This is a time when sales heat up. To put this in perspective, we had 67,958 homes sold back in 2004, a full decade ago.
The recent sales figures continue to show a slow start to the spring and summer SoCal selling season. While sellers in many areas are now asking for peak prices, the number of debt slaves buyers continues to shrink as many homes languish on the market. Of course in some markets the number of house lusting buyers continues to provide enough fodder to keep the game going, at least when it comes to prices. As we’ve noted, housing inflection points take a few years to hit and turn. After a few solid years, it does appear that things are softening. You want to see rising home values as an ancillary result of a rising economy, not an investor led rush or a controlled market via banks leaking inventory out at a molasses like pace. On another note, a study called “Prevalence rates for depression by industry: a claims database analysis†found that those in the real estate industry have the highest rates of seeking out treatment for depression. I’ve always had the impression that those in the real estate industry had a higher level of happiness based on all those real estate agent and mortgage broker cards I receive. As it turns out though, the study found that those dealing with the public in high stress activities (i.e., dealing with house lusting buyers and delusional sellers) can be detrimental to your mental health. Given the craziness in California housing and the social behavior I see, I can actually understand why this study found that those in real estate had the highest level of seeking out treatment for depression, only second to local/intercity passenger transit which I’m sure is a thrilling job of interacting with the bright and sunny public.
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