The renterfication of the United States: Modern day feudalism in America where mega landlords rent property out to the working serfs.
There has been a strong growth in renting households over the last five year. Even home builder optimism and permits are perking up but a large push is coming from builders putting up multi-unit properties. In other words, rentals. For most Americans with a positive net worth, most of it is tied up in their real estate equity. Consider a home a forced savings account (you have to sell to unlock that equity). But as the low interest rate environment swept the nation, big banks and investors decided to try their luck in being landlords.  After all, you just had 10 million people lose their homes to foreclosure and they will need to live somewhere. Like a simple math equation, we’ve also gained 10 million renter households in the last decade. Yet this trend is continuing even in the face of our six-year recovery. You are seeing in China how quickly psychology can turn. The real estate market in China has slowed down considerably so people were plowing money into the stock market where valuations were ridiculous. The market in China has lost close to $3 trillion in market cap recently. So much for prices only go up. And of course if this is more than a tiny trend and a real correction, some of the hot money from Asia may start slowing down as when the Nikkei imploded. These are outside forces and for most Americans, renting is becoming the economic choice.
Feudal America
There is a deep desire to own a home in the United States. Of course any cultural references show a home with a big lawn, white picket fence, and a good sized lot. They rarely show the crap shacks that were built in the Great Depression or after World War II selling for $700,000 and still need work so you aren’t starring at a popcorn ceiling when you go to sleep. The choice many face in high priced metros is this: deal with rental prices going up or buying a home with an inflated price and being locked in for 30 years. Interestingly enough, people are going with the renting option.
The overall trend is unmistakable contrary to the anecdotes that your co-worker just paid one million dollars for a piece of poorly built junk not even fit to shelter gold rush workers in San Francisco. Here is the trend:
The trend is very clear. The homeownership rate is down significantly while the percentage of households that rent is up big time. And don’t think this is some kind of typical situation. We usually have a much higher level of household formation of home owners versus renters. Take a look at this:
In the 2000s, we gained about 500,000 renter households per year. From 2010 to 2014, we are at a pace of 900,000 per year. The population sure didn’t double since the 2000s so something else is going on here. What is going on is the real estate market is now part of the low rate casinofication of the markets. That is, the Fed has made everyone into a speculator whether they acknowledge it or not. If you rent, you are short the housing market. If you own, you are long housing. And if you live in a place like California, buying a home is like buying a stock on the NASDAQ. Things can go really well or implode in your face.
Since 1993, most of the growth in homeownership has come from the Taco Tuesday old timers:
The only group to still be in the green here is the 65 and older crowd. In California, you have many young adult kids moving back home with parents because they simply can’t afford a rental let alone purchase an equivalent crap shack of their own.
Keep in mind that investors started buying in bulk in 2009 and heavy in 2010 (this started slowing down in late 2013). This was a time when credit was tight for the average American. However, since there was a risk free bet setup for the banks, many borrowed at a level that was equivalent to free and started buying up single family homes. This bet has paid off big. There were deals made in blocks where hedge funds bought giant groups of homes and turned them into rentals. Your average person was out played and keep in mind the economy was in the dumps at this time as well.
So now those that complain are basically crying that they didn’t market time correctly. These are the sounds of a speculator, not a homeowner. You could have also bought Google stock or Netflix stock earlier. Housing for the most part shouldn’t be seen as a volatile stock but the Fed has turned it into one. Double-digit annual gains with no income growth? How does that even make fundamental sense? It was funny how quickly the talk of China buying up all of California cooled down with their markets in full on implosion mode. Even a month ago I was getting people telling me that the Shanghai Composite was well on its way to 6,000. It reminded me of the DOW 36,000 calls back in the late 1990s:
One thing is certain and that is a larger percentage of our population is now becoming renters. Many Millennials are choosing to rent by choice, even though some of these people can buy. In financial amnesia California, people would buy even if they couldn’t pay the mortgage. So the low sales volume is merely indicative of people not having the cash to qualify for crap shacks. The LA/OC market is the most overvalued market in the entire country. Builders who have to make big bets on the future with real money are betting that this renter trend is going to continue.
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91 Responses to “The renterfication of the United States: Modern day feudalism in America where mega landlords rent property out to the working serfs.”
This is interesting and timely information. Just this morning, the Denver Post published an article stating that a rent of $1,700 for a 3-bedroom house was still more affordable than buying in Denver county and some of the surrounding counties (JeffCo, etc.) 50% of the median income would be required to pay the mortgage on a median priced home in Denver proper.
As tens of thousands (literally) more apartments come online here, though, it’ll be interesting to see what vacancy rates look like in 1-2 years. Things are expected to soften, but with home prices rising out of range for so many, renting may continue to be the more popular option. We shall see.
It’s common knowledge that rents are increasing dramatically.
One metric rarely discussed is rental unit density. (number of people per rental unit).
If such a chart was available, I am 100% sure that the trend line would indicate an average Joe renter is paying more $$ for *less* square footage and sharing that space with a greater number of others.
In places like Austin, TX, home prices have surged to outrageous levels and rent has followed. In fact, median rent is more than 1/3 of median, per capita income. If the law states that rent cannot exceed 1/3 of monthly income, how are these places renting out? Room mates. That’s how. So much for independence and freedom.
Just exactly what law are you referring to when you say that “rent cannot exceed 1/3 of income”?
buy then wait for real estate prices to go up
or wait for prices to go down then buy
best time to plant a tree was in 1996 or today
Agreed, although the best time to plant a tree is 20 years ago the 2nd best time is today
It’s Good to Be Rich !!!
================
Rich folks don’t need to work on any schedule (9-5).
They have TIME to Think, Contemplate, Watch, Plan, Weigh the Risks,
set-up a Plan of Action … about how to use their valuable money
and how to multiply their money.
This means “Timing” the Real Estate Market,
Timing the Stock and Bond Market,
watching for the “spend-aholics” to go broke
so that they can provide them with “Hard-Money Loans (20% interest)”.
Timing means buying things CHEAP, CHEAP, CHEAP and still getting
to hold on to the MAJORITY OF YOUR CASH …. How very very NICE !!!
Rich people are PREDATORS and Opportunists !!
** TIME IS ON THE RICH PERSON’S SIDE . **
Paul,
I am assuming you are being ironic. If not,
I have never posted here, but your comments rubbed me the wrong way. As far as I know, and apart from a handful who inherited or won their money, those you call rich earned it through hard work and dedication.
Case in point: I came to the U.S. In 1973 with $50 and a high school education. I cleaned toilets, waited on tables, cooked etc etc. , put myself through college and law school. Bottom line, I retired at 54 (no more 9-5, or rather 7-9!) with several rental units all paid for and worth over $2 mill. I now enjoyed the good life traveling the world etc.
My unsolicited advice to you. Stop whining. Get your ass to work (working 8 hours a day won’t do). And later……… enjoy it.
@Couvrot:
That is fantastic that you were able to do what you did. I’m sure it took an unimaginable amount of dedication and hard work. However, there are a few flaws in your rationale in my mind. Just like many or most other professions, law is one where it is harder to make money than it used to be. Too many lawyers- your typical supply and demand problem. I feel like I am at least somewhat qualified to speak on this point, as I am married to a lawyer, and one that went to a decent school. Yeah, there are some lawyers that do really well; most others just do ok. If you were to come to this country today with only a high school education, you would likely have a tough time getting into any decent law school unless you miraculously ace the LSAT. And if you don’t go to a decent law school, you probably won’t get a good job, and won’t make much money. And regardless if where you go for law school (great school or crappy school), the cost of your law school education will probably be exponentially higher than what you paid in the ‘70’s or ‘80’s. Those loans would detract from your savings quite a bit.
Also, there are no guarantees that you will live to see middle- or old-age, especially if you have a high-stress job. Therefore, you might work yourself to death for nothing. What a life!
Lastly, unless you bought in 2005-2006, those rental units you purchased were probably not purchased at the peak of the market, such as the apparent market condition we find ourselves in today. Although many of us here are hoping for at least a small crash in RE prices, the future is uncertain, and it’s plausible that RE prices could continue to increase, however irrational that sounds. So you likely got a deal on your rental units, relatively speaking.
My point here is that your experience is not necessarily repeatable today. This is not making excuses. It’s just the way it is.
A lot of people might define success as the meeting point between hard work/preparation and opportunity. You can do a lot of hard work/preparation today, but the opportunities are further and fewer between than in past generations. There is still opportunity- just less of it.
As far as I know, and apart from a handful who inherited or won their money, those you call rich earned it through hard work and dedication.
i believe it depends on one’s definition of “rich”, especially vis-a-vis “wealthy”. The majority of the truly wealthy are of generational money. That said there is also a significant portion of those that are rich that had the benefit of upper class upbringings and access to education. While it would be foolish to discount the accomplishments of these achievers, it must be acknowledged that no matter how strong their skills and character, that they benefited in many ways solely by accident of birth. Despite all his genetic talents, if Bill Gates was born into a poor farming family in Mexico, a mere few thousand miles from his American birthplace, he would not have achieved what he did. The opposite of what you accuse Paul of advocating is an ugly Social Darwinism that can be used to justify all kinds of maliciousness
Damn right, people that work hard and invest become winners. My wife and I have on high school degree between the two of us yet we are in the top one percent of net worth individuals. Hard work and self denial have made us winners and @ 63 I would rather roof a house than play golf.
Just like Donald Trump, a monkey could have become a millionaire by buying a few houses in most of the major cities the last twenty years , and the FED and their ZERO rate policy would have made them fabulously wealthy.
I got news for you, the ease at which you made your millions (not to say cleaning toilets is easy but lots of people do it just to make ends meet) WILL NOT BE REPEATED for those who follow in your foot steps.
Your current situation comes from a formula, a formula where an important ingredient known as A FED GONE NUTS!
@NihilistZerO: I could not agree more. and I also thought of Bill Gates’ upper- or upper-middle class upbringing as a contributing factor to his success. It seems that many people who claim to have created their wealth from nothing, actually had the benefit of an upper-middle class (or better) upbringing as a springboard to their success in one manner or another. There are, of course, many people who did create something from nothing. However, I suspect that these comprise a minority of success stories, at least from my knowledge and experience.
He is spot on! He is referring to time and how valuable it is. He is also referring to rich people. Having a few million is nice and you earned it, but it isn’t even close to being rich. You are well off, maybe financially secure, but not the rich he is referring to. By a long shot.
What is your point?
Lynn..Rich is much overused 4 letter word, I can tell you that in our circles when we refer to anyone in the .5 to 1% it is called crazy money and I mean way way out there, it is a very small club world wide. My wife and I, happy just to be healthy very comfortable, and say everyday we wake up it is Sat.
PS This fall we will enter the world of RE selling again, we are not going to need our second home amymore
On another blog/site I frequent most of the folks are early retirees with money. The consensus there is that “rich” means having more than twice as much as I have – This is true if “I” have $100K or $100M. Once your basic needs are met the rest is all psychology.
**** Message to COUVROT: ****
“WHAT THE HELL ARE YOU TALKING ABOUT ???? †You missed the point.
First of all .. I was NOT being “ironic†and I was not whining (I HAVE MONEY),
and reading what you wrote …. I think I have more $$$$ than you.
I hate to say this — but reading your post, I can tell you missed my point
because you either worked all your life … or still continue to work
because you HAVE TO WORK. If a person, any person MUST work
then he does NOT have the LUXURY OF FREE TIME.
However THE RICH HAVE TIME ON THEIR SIDE …
“TIME to Think, Contemplate, Watch, Plan, Weigh the Risks,
set-up a Plan of Action … about how to use their valuable money
and how to multiply their money.†(They have time to “time the all the marketsâ€).
THEY HAVE TIME TO GET SMARTER. THEY WATCH PEOPLE WHO ARE “LESS†SMART ,
AND THEN THEY POUNCE ON THAT OPPORTUNITY THAT NO ONE SEES OR SOMEONE
ELSE’S FAILURES
I noticed that this Blog-Poster understood:
“Lynn Chase -July 10, 2015 at 4:24 pm
He is spot on! He is referring to time and how valuable it is.
He is also referring to rich people. Having a few million is nice
and you earned it, but it isn’t even close to being rich.
You are well off, maybe financially secure, but
not the rich he is referring to. By a long shot. “
Damn that chart up there is dramatic. So the average American is going to be stuck renting to homes purchased from Chinese. The Chinese owns US.
The Chinese are not stupid and today’s home prices make no sense for an investor
I have it on very good information from a Chinese Real Estate Agent, that the so-called Chinese Investors are NOT INVESTING .. They are simply “moving money” — in other words ” cleaning money”. They can pull this off, because they have the cooperation of unethical Escrow companies that accept wire transfers for amounts larger than the purchase price of the homes they are buying .. The rest of the money goes back to the so-called Asian investor here in the USA . The homes are frequently sold for break-even or at a loss within a few months — so they can “cash-out”. They just want their CASH away from China and in US Dollars. ** It happens alot in So.Calif.**
Chinese market skyrocketed today. highest one-day rise in 6 years. Yes, I know they’ve lost plenty in the past few months, but we can’t look at their system for guidance, as it is all controlled by the govt. so they can manipulate things.
Any corrections will play out for several days, and then the sharks, restlessly will dive back in and purchase the decent remnants that come on the market. The transfer of wealth is only half-way complete. Any (supposed) downturn will only profit the wealthy.
Any corrections will play out for several days, and then the sharks, restlessly will dive back in and purchase the decent remnants that come on the market.
It would seem the Sharks are being held in the tank at gunpoint:
Utter Desperation: Chinese Police Vow To Arrest “Malicious Short Sellers”
The market bulls are reminding me of scared teenagers shuddering in the corner in a slasher movie. If I keep my eyes shut, he’ll just go away…
i read what you had to say in your blog heath, but it wouldn’t let me make up a handle of a name so i won’t be posting, just reading. good luck
Same here as ben, I tried to post comments but the posting form didn’t work for whatever reason. Sorry to say I probably won’t bother anymore, I find the posting form account thingy to be a bit odd and then I can’t get it to work so…
Hoping you can get some other commenting system in place more like this one.
@ben @Hotel California
Fixed commenting! I forgot to set it to open LOL! I’m gonna try it un-moderated for now so your posts will show up immediately. If we get SPAM bombed I’ll change it to moderated but I’ll check it quite often!
Thanks for showing so much interest guys!
Fixed the comments section to “open”. Rookie mistake LOL!
Anyone else read the full transcript of Trump’s rant? He said some pretty interesting stuff after the immigration diatribe: Donald Trump Announcement Transcript
Jeff…Manipulate, you can’t sell stock at the present time, it is a one way street and so will their economy, round-about, no outlet, cul-de-sac?
http://www.nytimes.com/2015/07/10/world/asia/china-stock-market-crash-communist-xi-jinping.html
“The giddiest investors, including those who took on debt to buy stock, are wondering if they can recover their fortunes. Some have posted notices on property rental and sales websites saying they need to sell their homes quickly to raise cash.”
Surely this will be contained only to mainland China and not have any knock-on effects for markets with a heavy reliance on Chinese real estate buying. Surely.
surely you can’t be serious, and don’t call me shirley
Don’t call me Shirley.
Good comments, Ben & Prince
Housing report… In Denver for 5 days and folks you get very little there for your money. We went to a new area in Unincorporated Jeffco, houses on 6000 to 7,000ft lots. avg house size about 2900 to3200 sq. ft. prices without upgrades or lot premiums of 90k that over look C470 highway, and a NHRA sanction race track, with water tower and power grids? 796k to 925k. Nothing but locals with 2 or 3 kids in a daze (must be the marijuana). You have to be on something to be over 1 million dollars for these rather Spartan houses. Anyway, young real estate agents telling them buy now and make more money in three years, against NRA rules but these agents threw rules out when they saw all these homes selling overnight. A bubble? wow I see a complete bursting coming up in that town.
I live in unincorporated Jeffco. Denver proper is a sick joke but the suburbs aren’t much better. Trying to figure out if and when to buy here or if we should even stay. I know the Midwest has tough weather but I might trade that for a simpler lifestyle and lower cost of living. Staying anywhere on Colorado is getting harder to justify. Very expensive and crowded.
796k to 925k……..my f’ing god that is insane!! how the hell are these families making ~$240K a year to be able to afford those prices? I don’t know anyone who’s making over $100K a year.
there is no hope anymore, i’ve been beaten down.
i was looking at renting an apartment and the rents are insane, $1700 2 bedroom 900 sq ft.
i just hope i don’t live so long that i end up in some state run old folks home with a caretaker that refused to learn English so i’ll have top learn Spanish in my 90’s….oh the horror.
@interesting:
I can relate to some extent. My wife and I do ok for the time being: over 100k, less than 200k combined (not willing to be more specific). I swear that everyone seems to earn more than us. Some acquaintances of ours bought a $1.2M fixer in L.A. They apparently bought it in late 2014, and are living in their other house (bought for just under $1M almost 10 years ago) until they are done renovating the new one. I know another person that bought a $750k condo in coastal OC a year or so ago. Another buddy of mine expects to make $200k+ this year, in addition to his wife’s salary who works for a school district and gets a great retirement. We could technically afford to buy an $800k+ condo/house, but it would be a disaster if one of us lost a job, got sick, etc. Therefore, we would like to buy something closer to $500k in OC. Good luck finding anything decent for that pittance anywhere desirable in OC.
Sometimes I feel like saying f*** it and moving to flyover country to buy one of those really nice $330k houses that @WeDontMakeThoseDrinksNoMore posted in the last article. Seems so much less stressful at times. Housing in So Cal is seriously out of control and I feel like I can’t keep up, even while earning what might be considered a halfway decent income in other areas of the country.
In conclusion, I feel beaten down and defeated as well, despite however much of a first world problem this might be.
Exactly,this is what is happening in London England.Yes the rents are escalating yet the multiple occupancy is going up,dramatically in some places,with two or three families sharing a single occupancy house,as they save furiously to buy at staggering prices.Even formerly peasant houses are now being looked at as if palaces and priced accordingly.
But the big question on everyones’ mind is “just how long until houses slumps and will my job go with it-if ever?”After all the Fed has proved itself that it is unwilling to allow free markets just like China.
We went to a good friends 4th party, to a person nobody understands where these folks are coming up with the money to buy these houses and pay the rent in Denver. Young guys there told me with the wife working they make about 150k combine but with kids and taxes no way thay can buy at these inflated prices.
Can’t be investors, nobody in their right mind would do it. I did meet a man from Texas who said he bought a 850k house because his oil contract runs out in 5 years and he will sell for $1.2 million and move back to Houston. I didn’t want to spoil his Bar-B-Que rib dinner. I moved on to the next couple who wanted to talk about fireworks and why so much rain, it felt good to stop the depression of real estate stories from most everyone in this country?
“Six-year recovery”
Recovery…
I don’t think people remember what that word even means if they’re calling this a “recovery”
First off, I sleep under a ‘popcorn ceiling’, and no ‘master suite’ or ‘chef’s kitchen’. But, then again it is one of the reasons why I have financial security and independence … I never felt like I had to keep up with the Joneses. LA/OC have two problems, too big of an affordability gap, and too many who still chase the ‘California Dream’ at any cost. There is little hope for those on the wrong side of the affordability gap. But California is full of fools who live in ‘total deniability’, stretching themselves to buy that nice home within a few miles of the beach or that inland crap shack …they are obsessed with the notion of instant $$ equity, and perhaps if not money, then material status! I got out of So. Cal. and now split my time between Denver and Montana. Denver too is becoming a mini-L.A. with one difference, there is still developable land, and builders are throwing homes up fast. And, there appear to be plenty of ‘brainwashed buyers’ who will enter into a 30 year, $500k plus mortgage. Personally, I think the smart ones are those who have taken advantage of this market and sold and made a handsome profit, or those who choose to rent because they know what a trap today’s prices are combined with the giant anchor called a mortgage!
Just took the plunge and bought in the Denver suburbs after living here for 13 years as a renter (from CA, sorry haters), and then living in my GF’s townhouse for the last two years that she owns. We just closed on an immaculate 8500 sq ft lot, 1850 sq ft finished, 700 sq ft unfinished basement. We paid approx 325k w/ 10% down and our payment is $1800 all in taxes, ins, pmi included. Wish we would have bought 1-2 years ago, especially with the absolute frenzy that has overcome housing in the front range. We probably paid 10% more than we would have a year or so ago, but when I compare that with the cost of a 2 bedroom rental for $1700 and the crap shacks in So Cal in less than desirable neighborhoods going for 600k, I feel a little better.
I’m so happy to hear you found a place. Sounds nice! We tried last year. We had 20% down and our agent told us that wasn’t good enough. Even more than the rapidly increasing prices were the bidding wars that kept me up at night. We couldn’t do it anymore. But I’ve had a few friends that bought and have been happy, which is good too. 🙂
Hoping to buy next year with better luck. Welcome to CO!!!
I mis read your post. Looks like you’ve been in CO for awhile. Either way, not all CO natives hate Californians. ;)))
Good purchase 325k is spot on. But the 700k and up crowd buying in Denver, I’m not so elated for them. Good luck enjoy
The Fall Of Homeownership & The Rise of The Rental Recovery
3 charts that show the boom and bust of housing and the economic reality of this housing cycle with my interview on CNBC on this economic reality
http://loganmohtashami.com/2015/04/28/the-fall-of-homeownership-in-america/
“The rise of new home ownership will result from wage growth and increased liquid assets, not from financial engineering.”
What about the fall or prices due to real estate over-speculation? You believe that price downturns will only occur if there is a job-loss recession? But doesn’t that run counter with the fact that the organic home ownership has fallen tremendously in favor of that of investment firms? In that context, wouldn’t an asset bubble be a bigger culprit for falling prices?
“The overall trend is unmistakable contrary to the anecdotes that your co-worker just paid one million dollars for a piece of poorly built junk not even fit to shelter gold rush workers in San Francisco.”
Sold: June 23, 2015
https://www.redfin.com/CA/San-Francisco/318-30th-Ave-94121/home/2021165
I think it’s going to take some time for people to adjust their thinking. This house was built as temporary housing after the 1906 earthquake and its going to take hundreds of thousands to make it livable. I thought the bubble was topping out but maybe not.
I live a couple miles away on the other side of GG park. I need to really start sweet talking my wife and sell our place. That is crazy pricing and the taxes on that house will be 15K a year. When hot money ends we will see change. Remember the fed is reinvesting MBS they bought and turning it over via treasury…
China is slowing down drastically and it will hurt…
This lot is zoned for 2 units, but for a rebuild the price might be a bit steep. A very nice location for sure.
Rent control is still matter to be considered for rebuild.
“Chinese selling homes to cover stock losses: local media”
http://finance.yahoo.com/news/chinese-selling-homes-cover-stock-073727009.html
“Tech companies may feel jolt of China’s dropping stock market”
http://www.marinij.com/general-news/20150708/tech-companies-may-feel-jolt-of-chinas-dropping-stock-market
If this thing spills over into the Chinese property market, will Beijing continue to panic and threaten to arrest sellers of real estate? Only the most naive and delusional amongst us would believe that the Chinese authorities’ reactions to their stock market crash aren’t acts of desperation. At every turn they are sowing rapidly growing new seeds of doubt and contagion. We shall find out soon enough on the SoCal housing price bubble players’ bet that their Chinese neighbors will be immune to the fallout.
Irrespective of Chinese buyer bailing out or a stock market crash, the fact remains that an average joe 6pac can’t afford housing in socal.
we’d see if the bubble burst..
The thing with the Chinese buyers is, all they are doing is enabling the specuvestors who have taken advantage of 0% FED bucks. From 2008-2012 Chinese buyers were buying at near the same clip at the much lower prices. Now they represent a disproportionate % of buyers as the organic domestic purchasers have been priced out.
Foreign buyers won’t pay higher prices “just because” as inventory is increasing and their is downward pressure on prices the domestic buyers can reenter the market at these lower prices. In an increased inventory environment there will be no pressure on foreign capital to bid prices higher. Once again we are facing a bubbleized market of fantasy valuations that has been engineered solely by the FED
DON’T BUY: 14 US housing markets where it makes economic sense to rent
Read more: http://www.businessinsider.com/us-housing-markets-where-you-should-rent-2015-7?op=1#ixzz3fVNnrQ9a
I don’t get it, who are all these people buying? My wife and I missed the opportunity to buy in Sherman Oaks in 2012 and now we refuse to leverage everything we have to own. So we prefer to rent until prices drop.
We make over 250K combined but I will admit that she makes the bulk of it. Yet, our neighbors who make way less drive 80K cars. We know this because they freely share their financial status. We don’t need things to tank, a 15% drop will do so that we don’t get over our heads with debt.
In a similar spot on the Westside. $200k+ combined income, $150k+ savings but no way we can afford these prices in a good school district.
We have a pretty good deal on rent, ~$2k for a 2+1 standalone house that shares the lot with another house but we are going to need more space at some point and the inventory for SFH rentals is not good.
Some of my coworkers are the ones that bought in the past year (C-Suite and SVP level at a publicly traded company), so I know who is buying at these inflated prices. They justified it with the “historically low interest rates”.
We have a 2 year time horizon to buy but would need a dip for me to feel comfortable putting ~$200k into a house.
15-20% in a prime area like Sherman Oaks is not an unreasonable expectation. When mortgage rates hit 5% then you’d need at least that to keep the monthly nut the same.
My wife and I are in Orange County. We can afford to buy, but I want no part in these insane prices and have now seen bidding contests for homes. $750k for a 1400 square foot home I will never do. Same for rent. Renting is insanely expensive and would cut our monthly savings in half. We live with my wife’s parents. There are many things I don’t like (even hate) about it, except the first of the month when my rent is $0. We do pay all of the utilities, but I refuse to be a part of this insane market.
If you think that’s crazy, come to West LA. If your house is within the borders of a good elementary school, 1400 square feet will run you $1.5 million for a detached home.
what if the drop never comes…
it may be stagflation for years to come along with your wage stagflation…
would you leave socal ?
I’m curious, if your mother in law decided not to let you stay in her house, how would you ‘refuse’ to be a part of the insane market?
Crap shack built in 1941, 2 bedroom, 1 bath, no garage or backyard (the landlord has the garage full of storage and most of the back yard has 5 used cars sitting in it) 40′ wide lot, unimproved kitchen and dilapidated bathroom in Redondo Beach, CA, rents for >$2500/mo. Market value: $1 million. For the time being.
For those of you who are frustrated and even angry as you watch the train seemingly leaving the station, just take a look at any long-term (many decades) housing price chart. While there is a very long-term trend going up, it’s a gentle slope. In the short term (less than two decades), prices always form a big wave, but what makes it scary is that the upswing can be as high as the decades of long-term upward progress that came before it. The short-term upswings also frequently take longer than the downswings, and so waiting them out can be torturous. The last trough-to-peak was nearly 10 years, and so far this one has been 6-7 years (depending on what area you’re looking at). Patience. Prices WILL drop. Realtors depend on the public perception being otherwise, so they have no choice but to lie – or switch professions. Lying is easier. I think some begin to believe it themselves after a while. What’s really odd is that they don’t realize how ridiculous it sounds – the idea that this time is different – that THIS time, we can safely ignore hundreds of years of experience in commerce. That this will actually happen for the first time now, during their career as realtors, is only a coincidence.
Some other advice:
On the way down, don’t wait for prices to flatline, hoping it’s the “bottom”. Keep the long-term upward slope in mind and jump in when it makes sense for you. Prices will not reach 2008-2010 levels again. The 3/2 IE rental that was a great buy at $200k in 2009 and is now outrageous at $350k will be a great buy again at $270k.
Once you’re comfortable with prices and found a place you like, offer more than asking. Significantly more if you love it, because someone else will love it, too. Wifey and I kicked ourselves at the time for paying 2% more than we thought we should have for a house we loved, but 5 years later we can laugh about how insignificant that 2% was compared to the very long-term trend, let alone the peaks that came before and since.
“Prices will not reach 2008-2010 levels again.”
Perhaps not nominally, but what matters is in real terms.
Why wouldn’t prices revisit 2008-2010? The world is far more over-leveraged today than it is back then. If the existing amount unprecedented manipulation can’t sustain current stratospheric prices, what else could the government and Fed do prevent another downturn of equal or greater magnitude?
2008-2010 did not represent a natural bottom. Only when big time investors jumped in with cheap money (thanks to ZIRP) did the bleeding stop. Today, these same investors are over-leveraged. I don’t think they’ll be able to double down again (borrow more money) if the value of their current RE portfolios take a nose dive.
It would be interesting to see an immigration graph on top of a price growth chart. Zero-growth policies paired with unlimited immigration will cause a price bubble regardless of what the fed does. Eventually a large percentage of businesses in the area will become uncompetitive due to land cost/housing cost and will either close or move. By then, the middle will have already been replaced by a sea of diversity and the whole thing will turn into a festering hole. Some would say it already has.
It’s fascinating to me how little dissent there is as we watch it all turn to crap. In my ever so humble opinion, it’s all going to burn.
we should have an immigration policy like australia. only talented highly educated people of the world. close the borders to the turd world like mexico
IPFreely, spot on. Uncontrolled immigration but CA businesses love it because of massive labor pool, PT/contract workers easily replaced. People celebrate minimum wage increase but cost of electricity, water, housing, food, healthcare, goods keep rising; a moot point. Fewer employees on the schedule. I was at a store recently in SoCal, 15 people in line with two cashiers; the guy behind me in line began yelling obscenities and was becoming agitated so I walked out. Many in the line looked like recently released prisoners, or slovenly like they had simply given up. It wasn’t a terrible area.
People packed like sardines; more born/arriving. Crime going up, more traffic, crumbling infrastructure. The population of homeless/working poor in SoCal exploding. Even in nicer ‘hoods more bodies per residence as kids move back after college, middle age kids move back after job loss, BK, divorce; some “kids” never move out, many never will. Go to some nicer areas, good luck parking…where did all those cars come from?
Surely none of this will affect those living in desirable enclaves; please carry on.
Apparently it is the intention of corporate America to squeeze every last remaining cent from the 99%. National corporations own enough rental properties to create an oligopoly of greedy corporations, think they are going to cut the rent? Large banks hand out loans to wealthy foreign nationals who want to buy up vacation properties in the USA. Heck, the new status symbol in China is to own a vacation home in the USA. Too big to fail banks continue to unload properties by demolishing homes. For a couple of grand they can demolish the home and hand it back to the state or federal government. As part of the too big to fail bail out, the Federal government helps to cover “losses” from foreclosed home.
The list of how the game is rigged is quite long. The people around the world need to stand up to the greedy elites. https://youtu.be/6N9PZAc8hCE
Here in Fremont (SF East Bay and most sought after by Asian buyers) selling has slowed a bit. The last 3 years saw “open house on Sunday afternoon and review offers on Tuesday.”
Now, on over half of the overpriced crap shacks for sale, several weeks have gone by with, no sold or sale pending signs, only open house this week.
Whats Up?
Sellers are not seeing those “Chinese suitcases filled with cash any more”.?
Thanks Tolucatom for the Area’s that are smarter to rent link.
I knew I was smart to rent in Alameda county, This is a dumb time to buy.
I’m right there with all of you. Looking in Woodland Hills, $300k saved, but can’t stomach putting it into a crappy fixer upper. Will keep saving and waiting it out.
We have friends that went bankrupt 7 years ago, lost their condo and just bought a house, moving in this weekend in N. Hollywood. Terrible area across from an old apartment building and near a large main street, small house, 3% down and their house payments are almost double my rent…but they are homeowners!! I don’t want it that bad.
well put 🙂
“THE DAY LOS ANGELES’S BUBBLE BURST”
http://www.nytimes.com/1984/12/08/opinion/the-day-los-angeles-s-bubble-burst.html
Same old plot and stage with a new set.
The same old bullshit lines being sold by the touts of Manhattan Beach adjacent to some hills near Culver City and everywhere in-between.
Rich people will always buy.
The weather.
International marketplace.
Good find. Great read. Spooky how it all sounds the same.
You mean after 35+ years of trying, this time will be different as Los Angeles will finally transforms into an international city rivaling Paris, London, or New York?
The gentrification propaganda is as pathetic as regurgitated talking points from do-nothing politicians.
That article is truly a gem. Written in 1984 complaining how LA and NY real estate is too expensive. I sure wish I had a time machine to go back 30 years and buy up as much prime LA and NY real estate as possible. People who did so are fabulously wealthy today. Please no whining about “how could we have known the Fed went bonkers.” These places are all paid off now. Inflation and other forces has driven up housing prices and rent prices. The people who took the plunge 30 years ago are living on easy street. I plan on doing the same thing at the next dip, everybody here should be thinking the same.
Sorry, the idea is to pay as little as possible instead of tying up your money while hoping that prices will eventually recover. And there are the opportunity costs to consider. You could have bought apple stock at a discount in the 1990’s. Unfortunately, all your money is tied into your underwater mortgage.
@Lord Blankfein,
You clearly do not understand the difference between actual and nominal values.
The 1984 article states that 1980 prices in Santa Monica were $400K, Beverly Hills $1M. Using the (phony) calculations provided by the Bureau Of Labor and Statistics (http://www.bls.gov/data/inflation_calculator.htm), $400k in 1980 dollars should be about $1.2M in 2015 dollars, $1M in 1980 dollars should be about $2.9M in 2015 dollars. If you look at the May 2015 real estate sales for Santa Monica and Beverly Hills, that matches almost exactly using the (phony) BLS inflation calculator.
So this means in nominal dollars, real estate prices in prime areas have matched inflation (no price gains).
However, if one had bought the Dow Jones Index in 1980 at $850K, they would be sitting on a portfolio valued at $17.7 million. I.E. a 21X gain versus a 3x gain for real estate in prime SoCal areas.
“…complaining how LA and NY real estate is too expensive”
Nice spin attempt but the article’s message is actually about how people are doomed to repeat mistakes.
“I sure wish I had a time machine to go back 30 years and buy up as much prime LA and NY real estate as possible.”
Who wouldn’t, but that’s beside the point. The point is you’d be worse off by setting it 35 years back (or 10 years back).
“whining”
Distractive labeling.
“People who did so are fabulously wealthy today.”
“These places are all paid off now.”
“The people who took the plunge 30 years ago are living on easy street.”
Egregiously broad and thought terminating claims which require evidence that is impossible to fully aggregate. So they just sit there like rotting piles of crap on a hot sidewalk, acknowledged but no one is going anywhere near them.
@Hotel California: No.
@EBlo: Nice try with 850K put in the stock market argument. Real estate is highly leveraged, so the return is much greater than you elude to. You can’t live in a stock portfolio, so how much was the equivalent housing cost for those 31 years? Also, you better believe that these people did quite well in the stock market too. No, I don’t have evidence to support this. But we all know that the wealthy have much of their assets tied up in equities (that has been repeated here like a broken record).
Owning a primary residence in a decent area should be the goal of everybody on this board. Over the long term, the numbers make sense. Quit trying to cloud this argument!
Actually a reply to Ernst Blofeld. While real price gains may be minimal, the fact is that most people by homes on a mortgage. Given that leverage even nominal price gains with no change in real value will provide a tidy return to the purchaser. This is how most of us make money on homes in an inflationary environment. While this happens with equities as well to some extent, most equities aren’t purchased on margin and so the leverage effect is reduced or eliminated.
While I often grumble at Lord Blankfein’s aura of merry triumphalism and agree that property values may be setting up for another fall, he is right that over the long haul real estate has been one of the best investments around here.
Prince of Heck: And there are the opportunity costs to consider. You could have bought apple stock at a discount in the 1990’s.
It’s easy to know what stocks you should have bought 5, 10, or 20 years ago.
Stocks are a gamble. Buying Apple in the 1990s was not so much a smart move as a lucky gamble. Gamble on enough of those “opportunities” and you’ll liable to lose your shirt.
I know some people think that real estate is a gamble, but it’s a safer gamble than the stock market. Less risky if you research properly. Less likely for you to lose everything.
Would one take a time machine back 35 years vs 30 years to buy LA and NY real estate?
Did everyone who participated in buying LA and NY real estate 30 years ago end up “fabulously wealthy” on “easy street” with now “paid off” property?
The answer is “No.”
@son of a landlord
Your own argument could easily be applied to you; it’s easy to feel less stressed about overpaying for real estate 5, 10, or 30 years ago since you now know that the Fed’s economic policies is dependent on creating bubbles.
Apple stock was just one of many examples. Had you started a balanced growth fund 30 years ago, good chance that Intel, Wal-Mart, Exxon, IBM, or other blue-chip stocks would have been part of your portfolio. Those companies would have more than offset your losers. And your returns would have been higher than that of RE, not to mention dividends.
I am advocating diversity and value; it’s better to own both stocks and RE at the right price. In either cases, metrics exist to know when an asset is overpriced.
@apolitical scientist
Out of curiosity, I did the math assuming 5%-30yr mortgage with 0 down, and the gain is still only about as much as invested (i.e. 1$ gain per $1 of mortgage taken), not nearly as impressive as the DJ index example above.
Am I missing something here?
Details for math-savvy: $850k mortgage at 5% means the bank takes $1.7mil over 30yrs, which after selling for 2.89 x $0.85mil leaves ~$0.8mil of profit.
Morals of this continuing story: if you’re not part of the 1%, get out of prime areas. Buying vs renting is a person/family- and location-specific decision. Clearly in prime areas, renting makes sense. Wishing for a new era of affordable housing in prime areas is a waste of time.
Or rent in prime areas and wait to buy it goes down in prices
Anyone telling you it won’t go down ever or keep on increasing has drunk the coolaid..
As a owner of multiple properties in socal, I can tell you that owning a house has many invisible/recurring cost other than PITI..
It’s a pain unlike stock..
“China’s Real Problem Isn’t Stocks – It’s Real Estate!”
http://davidstockmanscontracorner.com/chinas-real-problem-isnt-stocks-its-real-estate/
“Then beyond China, it’ll send shockwaves through real estate worldwide.
After all, who are the leading buyers in cities like Sydney, Singapore, L.A., San Francisco, New York, Vancouver, and London? The Chinese! Just in 2014, they accounted for 24% of the total real estate purchases in the U.S. at some $22 billion!
You don’t have to be Einstein to understand what happens when foreign buyers with that kind of horsepower come to a halt.
But there is another layer to this – the country’s affluent have been fleeing their country in droves by moving “temporarily†to major English-speaking cities, in part to get their kids a top-notch education.
Except what they’re really doing is laundering their money out of the country by buying the most expensive real estate they can afford, usually for cash!
China’s government will only put up with this for so long – especially when their economy starts to putter out. They’ll have to stop this exodus sometime in the next year or so, and when they do, it will cause the global real estate bubble to implode.”
No worries though, the touts of Manhattan Beach adjacent guarantee !fabulous! wealth on easy street in 30 years.
It appears that those many Chinese investing in international real estate will have to liquidate to meet their stock margin calls.
@son of a landlord
Apple stock was just one of many examples. Had you started a balanced growth fund 30 years ago, good chance that Intel, Wal-Mart, Exxon, IBM, or other blue-chip stocks would have been part of your portfolio. Those companies would have more than offset your losers. And your returns would have been higher than that of RE, not to mention dividends.
In other words, stocks offer diversity and liquidity that RE never could.
And much better return, too.
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