California can be viewed as a microcosm of what is occurring across the United States. Few markets are propped up by a smaller affluent population while most, are pushed outward or to rentals as incomes go stagnant. People for the most part only pay attention to what is immediately around them. When the crisis hit in 2007 many were caught off guard although the warning signs were all over the place. As 2014 starts, we are now seeing a definite slowdown in housing even in higher priced areas. Inventory appears to be coming back online but sales are very weak since people are asking for peak prices and drinking the housing Kool-Aid with gusto. The median sales price in SoCal has stayed put since June but sales have fallen steadily. Across the state, with more rentals from investors prices are soft and unlikely to rise given that many Californians have not seen any real income gains over the last decade. For the most part, many are stuck in a bubble thinking things will remain the way they are simply by sheer momentum.
Americans tend to shun generational transfers in wealth especially when they are unwarranted and not based on individual merit. Heck, revolutions were fought with much bloodletting to rid the heavy chains of an aristocratic class that handed down the baton of wealth to future heirs. The question of baby boomers and real estate is an important one because you have one generation with much of their wealth tied up in one asset class while younger generations struggle to get by. In California, Prop 13 has been the subject of much debate and was at the hub of a rallying cry back in 1978 for tax reform, a rally many baby boomers remember (the older baby boomers were already in their early 30s at this point). One issue that constantly comes up with Prop 13 is that you don’t want grandma thrown out to roam around the streets of L.A. Of course, this assumption is that most people stay put in one home for 30-years (this is factually not the case). People move. A lot. The figures for California highlight a mobile class which flies in the face of Prop 13 justifications since properties are typically reassessed when they transfer hands.
Many are giddy about the rise in home prices. Yet gains in home prices with no subsequent gain in income are merely a repeat of the previous bubble with a different tune. In the last bubble, the memory has seemed to faded, the impetus for funky loan products came because incomes were not rising and products that offered additional leverage were taken up to mask the growing decline of wages. In the last couple of years, the tinder that lit this latest run came from the Fed’s artificially low rate eco-system. The difference this time is that the gains in home prices largely went to big investors that now dominate the market. In the midst of all this trading, the homeownership rate has fallen. Household formation for younger Americans is dismal. The economy officially exited the recession back in the summer of 2009 (half a decade ago this summer). So why is housing formation so weak when it comes to younger households if the economy is supposedly booming?
I am convinced that Californians enjoy having a sordid affair with real estate. The amount of justifications that get thrown around during booms and busts would be enough to fill a diagnostic manual for any aspiring psychologist. It is fairly well accepted that mortgage rates will only move in one direction from this point forward. So why would anyone lock into an artificially low rate via an ARM that is set to adjust in a short timeframe? Many Californians are opting for ARMs to compete with big money investors over the tiny crumbs of inventory out in the market. After all, home prices will be up in 5, 7, or 10 years and by that time you’ll be playing the equity ladder game once again, right? The usage of ARMs is surging for the non-investor share of buyers. A big reason is that California is largely unaffordable for the masses.
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