Feudalism was a set of customs in medieval Europe that setup a society in which relationships were based on holding land in exchange for service and labor. There is a modern day movement that is silently pushing out the middle class from truly owning real estate. In my view, there is no coincidence with the contracting US middle class and the massive expansion of “all cash†buyers. For most working Americans buying a home with all cash is so far removed from economic reality that it is not even an option. This used to be historically the case. However, since the Fed adjusted accounting rules and banks were able to control how inventory leaked out into the market, we suddenly have the highest number of cash and investors diving into the real estate market with alternative financing. People in Nevada, Arizona, and parts of Florida are competing with 50 to 60 percent of investors just to buy a home. In California the figure has been over 30 percent going back to 2009. Lower rates are a bigger pull for large investors since the safe trade in bonds or Treasuries is no longer there. So for this group, those 4 to 5 percent cap rate yields seem more attractive than the nearly non-existent rates on Treasuries. So we now have a system in place that is crushing the US homeownership rate and is shifting more property into concentrated hands.
We’ve all heard of people making dramatic commutes from the Inland Empire into Los Angeles and Orange counties. Personally I know a couple of people making commutes of 1.5 hours each way. Daily. For a couple of these people the allure of a cheap and big McMansion was too loud to ignore. Especially with the unaffordable cost of housing in Los Angeles and Orange counties people have opted to move further out. What was interesting was a recent study examined the commuting behavior of those living in the Inland Empire. What was found was not surprising but the large number of commuters is startling. Beacon Economics prepared a study for UC Riverside’s School of Business Administration and found that 40 percent of workers actually leave the Inland Empire to go to work. It is a fascinating look at the massive commuting culture we have here in Southern California but also underscores the lack of affordable housing near places of employment. Of course “close†is relative at least when it comes to driving.
The cash buying and investor segment of the market has been the major catalyst for the current run in real estate. Record low inventory coupled by low rates brought on one of the best year-over-year returns for real estate. The investor crowd can easily pullback as quickly as it dove in head first. We are already seeing some signs that investment buying is starting to slow. In real estate, things historically turn very slowly. The reason for this is because real estate is not a very liquid investment. However, we’ve never had this much hot money in the market. Inventory had been on a steady rise starting early in the year but recently, it appears that inventory is creeping back into its cave. In California those with golden real estate handcuffs are pulling back for possibly better days in 2014. What is surprising is that rentals and homes for sale both have seen decreases in inventory. Cash sales were up by 3 times the normal volume from 2001 and nearly twice the historical average going back to 1998. This average is skewed because it starts around the time of the massive real estate mania. So what happens when the cash crowd starts pulling back?
For most of the year, housing inventory was steadily increasing across the nation. In California, it appeared that inventory hit a bottom in February of this year. At that point, there were 109,000 homes available for sale. The latest figures going out to October showed 127,000 homes available for sale and this was down from 134,000 reached in August. There has also been a steady decline of homes available for rent. The cash investor crowd is still out buying in large numbers. The drop in inventory is typical for the fall and winter selling seasons in normal markets. However this drop in inventory is likely being brought on by other factors including the jump in interest rates and also, the perception that the market may be softening. The number of listings with price cuts was 17 percent earlier this year. Today it is up to 28 percent. Where did the inventory go?
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