The mania in certain California neighborhoods is so dramatic that my e-mail box is now filled on a daily basis with Real Homes of Genius. It isn’t as high as it was in 2007 at the apex of the last bubble but I’m seeing some pretty outrageous properties being listed for pipedream prices. Targeted markets are definitely benefitting from the investor fever. First, many of the homes being sold are actually being sold for the land. Given the headline cost plus construction costs this is a very tiny market segment here. Yet the froth is very obvious in these regions. Santa Monica is prime Westside housing. It is hard for anyone outside of the region to understand the crazy prices in Santa Monica. Even those in the region have a hard time understanding. Today we’ll focus on this area and pull up a property that only an investor could love. Welcome to the wonderful Republic of Santa Monica.
For the first time in nearly two years the California housing market showed some brief signs of cooling. The median price dipped and sales slowed down. The mortgage rate turbulence of the summer is likely to show up in late fall since the process of buying a home with escrow takes a bit of time to register in the current data. Although this is a current trend in terms of sales and prices we’ve also discussed why it is unlikely that California baby boomers will suddenly unload properties in mass. These owners may have equity trapped in their home but the only way to unlock it is via selling the place or going with a reverse mortgage which is like raiding the bank before handing something over to your heirs. California real estate has been in a perpetual cycle of booms and busts for nearly 30 years. That is why it is interesting to see the 2014 forecast put out by the California Association of Realtors (C.A.R.). The forecast is modest yet past history tells us a different story.
Never mistake luck with timing. That is one lesson gamblers and so-called investors forget time and time again. Even in baseball batting .300 is considered fantastic. The rhetoric being uttered by some people is similar to what was being said only a few years ago. Of course, the voices of the 5,000,000+ that went through foreclosure is largely drowned out similar to those that went all in with tech stocks right before the bust (where are the Pets.com investing geniuses?). Not to quote an Alanis Morissette song but isn’t it ironic? Suddenly folks that bought in 2011 or 2012 act as if they deserve a Ph.D. in economics. Don’t mistake luck with investing acumen. These people are caught up in the low rate, low inventory, and investor driven uptrend. California is an excellent example of this. Home prices are rising at astounding speeds pricing many out of the market. It is no surprise that the number of renters in the state is surging as well (this is also a nationwide trend). Investors dominate the market. A cap rate of 4 percent may be reasonable when the Fed is artificially creating a negative interest rate environment. This generational divide is going to continue and as usual, the US is going to undergo some dramatic changes including a growing renting class.
It was interesting to see that this week, the Nobel Prize, the biggest prize in economics went to three US economists, one being “irrational exuberance†Robert Shiller.  Markets for the most part are presumed to be efficient and what Shiller points out is the weaknesses inherent with this model.  The housing market is a perfect example.  The market is extremely inefficient when it comes to housing.  We massively subsidize this sector of the economy with the outward notion of helping regular buyers but do the opposite.  For example, the Fed’s QE initiatives have caused asymmetrical bets from financial institutions into residential real estate.  Largely because of this financial structure we went from a real estate market in free fall to one highly subsidized by low rates causing investors to crowd out regular buyers.  Prices now surge while the homeownership rate falls.  Of course how can the market be called efficient when the Fed provides this below market interest rate to a select group of people?  Is the public privy to this?  What use is a low rate when a bigger player comes in with all cash?
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