There is a simple bet to take if you believe housing is going to lead this nation into a next wave of prosperity. Take a bet on home builders. The argument is that the U.S. population continues to grow so therefore, prices on homes will simply continue to go up. But what if the growth is coming to households with lower wages? The iShares U.S. Home Construction ETF is down over 6 percent for the year while the S&P 500 is up 1 percent. What gives? Isn’t the housing market recovering? Prices are up because of constrained inventory (now slowly picking up), investor demand (starting to wane), and artificially low interest rates. You’ll notice that few of the major reasons for higher home prices have to do with household balance sheets improving. If you truly believe housing has healthy demographics ahead you would bet on home building. This index is moving in the opposite direction of prices. The place where we do see home building is with multi-family building permits. Builders are gearing up for a nation of renters. In fact, multi-family housing starts are up a massive 416 percent since their low in 2010. Apparently builders are realizing that with incomes so low and weak household formation that when these households begin to form, the first step will be in a rental. Many in the Millennial cohort live at home while house horny parents try their best to out-bid investors.
California is slowly splitting up into two clear distinct market segments. A smaller segment of wealthy individuals with access to capital and debt and another larger segment of financially struggling households. People might think that the trend of Californians moving out of the state is fairly new but this trend has been going on for over a decade. The state gaining the most from this domestic out migration is Texas. Surveys looking at reasons for people moving out include lower housing costs and a lower cost of living. Yet the population is increasing. The big reason for the increase is international migration. As we have recently noted there is a heavy focus in prime California markets for foreign investors, largely from China. Young families have little chance of competing in many California markets. Because of this it is no surprise that you have 2,300,000+ adults living at home with their parents. This group is not the future home buyer, not at these prices. Most are at home because they have lower paying jobs, no jobs, or heavy levels of student debt. Many are unable to even rent, let alone buy a home. So when we look at Census data, it is no surprise that the homeownership rate for young Californians has taken the biggest hit since the housing market peaked in 2007. Is California a place for the young home buyer?
The traditional home buyer is tapped out. You have a massive number of young adults living at home with very little financial means for purchasing a home. It is understandable that after a recession, people need to catch their footing before moving out and making the biggest purchase of their lives. However, something bigger is going on here. Global pools of capital are chasing assets all around the world. Investors are devouring real estate in all areas of the world from San Francisco to Vancouver. The rising unaffordability in real estate is really a larger reflection of a rise in global wealth inequality. Contrary to what some people may think, having a massive middle class similar to what exists in the US is a historical anomaly. The default position for our modern day history is one in which wealth inequality is extreme and profound. The recent argument was that as economies grew, this wealth would eventually lift the standard of living for all. There is new economic research showing that this isn’t always the case especially went a rentier class emerges. In fact, this wealth gap is being fully visualized through real estate. Some analysts have been scratching their heads wondering how housing prices could go up while homeownership is actually falling. How do you have soaring home prices with household incomes dropping? The fact that investors are dominating in the housing market shows how large and powerful these big pools of money have become.
So you still want to make the argument that cash buying is a small portion of the market? The latest sales data shows that cash buyers made up a record 42.7 percent of all sales in the first quarter of 2014. The latest National Association of Realtors report shows all cash purchases at 33 percent for the last month of data. RealtyTrac also follows auction sales that many times, do not show up on the MLS and as we all know institutional investors at times are buying blocks of homes directly from banks. I would assume this would account for a good portion of the difference between RealtyTrac data and that from the NAR. Either way, both are showing an incredibly high number of cash purchases. Overall, investors are chasing lower priced properties. Markets like Nevada, Arizona, and Florida have cash buyers making up the majority of all home purchases. In one of the reports this morning, a research company mentioned that in prime Irvine California, something like 80 percent of sales are going to Chinese foreign buyers. That is not a small amount of the buying pool. This is definitely not your traditional housing market.
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