The market in California is starting to splinter off into two distinct segments. First, in lower priced areas the pullback of investors has caused inventory to steadily rise. In places like the Inland Empire there doesn’t seem to be any urgency to buy anymore. In less desirable areas of L.A. and OC you have seen homes sit on the market as sellers try to ask for delusional pie in the sky prices. This segment of the market is feeling the withdrawal of investors. The second segment impacts smaller prime markets and prices have reached new peaks in some of these areas. Sales are dramatically down but house horny buyers are willing to stretch their budgets to whatever a bank is willing to lend them. Investors are pulling back here as well yet heavy buying still remains. The trend is very clear and that is large investors are not buying as many homes in California. Year-over-year large investors have dropped their buying activity by 31 percent. This is a big deal given the razor thin sales volume already happening. When you run the numbers in many markets, you see many areas overpriced on a variety of metrics. So what will happen to the market as investors continue to pullback?
New home sales had a horrible reading in the latest set of data. Hard to blame the polar vortex on this one since the only area in the country that saw a jump in sales was in the frigid Northeast but what of the other areas? Of course what the press fails to recognize is that Americans for the most part are too broke to afford homes at current investor inflated prices. Since more than 30 percent of all sales since 2008 were going to the investor class, this group pulling back is showing how solvent most households truly are. Some people assume that millions of holed up Millennials will emerge from their parent’s basement only to flood the market with an unrelenting appetite to purchase homes. First, many of these young adults don’t even have the incomes to cover rents in more expensive zip codes forget about purchasing a home. So it is no surprise that new home sales fully collapsed last month. The West had the second biggest monthly decline and we are flat out in a drought! Definitely can’t blame the weather here. What you can blame is affordability and with investors slowly pulling back, we will now find out the ability of the housing market to stand on its own two feet with more traditional buyers.
If a foreclosure happens in the wilderness, does it make a sound? It seems like people have conveniently forgotten that since the housing crisis hit we have witnessed more than 7,000,000+ foreclosures. Do you think these people believe the Fed is almighty and can stop a speeding train or turn water into wine? Apparently some people forget that the Fed failed to prevent the tech bust or the housing bust in the first place. Now, the Fed is somehow the cult leader and the leader will not let housing values fall. The nation still has 9.1 million seriously underwater homeowners on top of the more than 7 million that have gone through foreclosure. It is abundantly clear that the mindless drivel of “buying is always a good decision†is just that. Investors are starting to pull back in expensive states because value is harder to find. I see the lemmings at open houses and you can see the drool at the side of their mouths hoping for a morsel of real estate. The Fed, for better or worse, has turned us all into speculators. Simply putting your money in a bank is a losing battle because inflation is eroding your buying power. Yet wages are not keeping up. What you have is people competing with investors, foreign money, and a market with low inventory and trying to guess the next move from the Fed. Yet the tech bust and housing crash (keep in mind these happened only since 2000) were major events not prevented by the Fed.
I always found it fascinating that one of the most toxic mortgage products ever created, the option ARM was pushed heavily by California banking institutions. Places like WaMu, Countrywide Financial, First Fed, and other bygone institutions were heavily into this crack for housing mortgage. The premise of the loan was to free up cash for big money households. Of course, the unstated mission of the product was to push volume in a market where prices were out of reach for regular households yet boosted profits for banks. There simply wasn’t enough of those big income households (and they certainly weren’t buying in Torrance or parts of Pasadena). Today we still have only one out of three California households able to afford a house in the state in which they work and live. So it is no surprise that for the last half decade, one of the biggest buyers of homes in California has come in the form of investors chasing yield. Never have we seen such a high level of consistent buying from the investor class in the state. This has helped to mask stagnant incomes and has been a major player in pushing prices out of reach for most in spite of incredibly low interest rates. Trulia put out a “bubble watch†report and what a shock that Orange County and Los Angeles County lead the list in bubbliest looking counties in the nation.
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