The prospect of homeownership for many young Americans seems so far out of reach that many are resigned to be renters for the rest of their lives. In places like San Francisco and New York even those with decent paying jobs will find it hard to own a piece of real estate. Obviously many investors with easy money from the Fed realized this end-game and dove into the landlord business with all the gusto in the world. Wages are weak for the children of baby boomers. Many in fact are back living at home. Homeownership seems like a massive pipedream when many don’t even have the income to support a rental. Of course in California, you have odd inter-family dynamics where some kids are just waiting until the parents keel over so they can inherit the Prop 13 protected World War II built property. What more do people expect from a narrow focus on the present while ignoring the challenges facing a new generation of Americans? This structural change has also created a big hit on new home sales. Unfortunately for many a modern day system of debt serfdom awaits. For those that have the chance to buy, it may require a massive leap into debt on top of the student debt many already carry.
The growing disparity of income in the world is a major talking point at the World Economic Forum in Davos. Apparently there are only so many yachts and extra homes a rich hedge fund manager can buy. This large divide is only expanding and consequences are showing up in odd ways like large dark pools of money flooding into the once stale residential real estate market (the place where most Americans used to build their wealth). It was interesting to hear pundits act like apologists for the banking industry with the bailouts acting as if this would help the middle class. Well here we are in 2014 and most of the gains from 2009 have gone to a very small connected portion of our population. This new rentier class is dominating a large part of the residential market. In some states, more than 50 percent of residential real estate sales are going to investors. I was digging through some reports and saw that Florida, the younger sister of California had something like 62.5 percent of all sales going to all-cash buyers (that is, no mortgage was recorded on the sale). Who needs the plebs when you can buy up the entire Monopoly board!
Investor buying has pushed the real estate market into uncharted territory. Starting in 2008 after the crash in home values, investors at first stepped in slowly and now they represent a dramatic share of all home purchases. This may not matter to some in most states across the US but in places where investors are heavily focused, the power wielded by this group is still large. Sellers for the most part, this includes the banks off-loading distressed properties (aka repossessed homes), look for quick sales at the highest price. Sounds simple enough. Yet most in the public stand no chance with the large money crowd. For example, I know of people in targeted areas that scout for distressed properties and show up at auctions with checks ready to bid on properties. Some are individual investors and some work for a larger system of buyers. It is no new game with investors in the market but the volume of big institutional investors is definitely something new.
Welcome to landlord nation. People need a place to live and a recent Harvard analysis found that more Americans are spending a larger portion of their income on housing. More to the point, there are now 11.3 million Americans that spend half of their income on rent. This is a significant jump of 28 percent from 2007. Rents also went up throughout 2012 and the first half of 2013 so this figure has definitely increased. Is this a good thing for households? Probably not but that is simply the current trend. This is also a reason why only 1 out of 3 households can actually afford a home in California and is a direct consequence of the massive flood of investors into the real estate market. When properties go back into the market with artificially low supply, these owners have the ability to command higher prices. The end result? More money to landlords and less money in the pockets of renting households. And with America becoming more of a renter nation, this is putting a strain on the budgets of many households.
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