There is probably nothing so disheartening in the real estate world as writing an offer only to find you are not alone. With Coastal California inventory still so tight especially in the “more affordable price range” of under $1 Million, multiple offers are back and in full force. It’s not like they really went away exactly, great properties priced right often have multiple offers. What makes the current situation so difficult is that it’s no longer just the great properties, it’s also the pretty great properties. In fact, it’s even the pretty good ones so long as they are priced right. It appears that there just aren’t enough good, well priced properties to satisfy the demand. This begs the question, are we in another bubble? In summer 2006 I was at a BBQ in Palos Verdes and a friend’s friend was telling me how he’d been buying distressed properties in the Inland Empire at a discount and renting them but that he and his partners had begun liquidating because the market was over heated and the bubble was going to burst. I smiled and explained that there just weren’t enough homes to meet the demand and that I couldn’t see that we were in a bubble at all. I had actually thought the bubble was going to burst in 2004 and when it didn’t, I was “all in” to borrow a poker term.
What I didn’t understand at the time, was the reason the demand was so high was that loans were being made to people who weren’t qualified. If people actually had to qualify, demand would be much lower. In fact, demand was so high and loans were so easy that at the peak of the bubble home ownership nationally stood at over 69%, the highest level on record. So what about today, is today different?
Of course every real estate cycle shares certain common elements, that mainly being supply and demand. It may look different but it’s always about supply and demand. In the late 1980’s heated demand was fueled by money pouring in from Japan. Mid 2000’s it was easy financing. Today you could argue historically low interest rates are the driving force and the absence of inflation makes investing in real estate more attractive than the equity markets. (Questions? Ask Tim) I might be willing to accept this if it weren’t for the obscenely high rents and the continued difficulty in obtaining a mortgage. Rents are so high in greater Los Angeles in fact, that the average Southern Californian renter is spending roughly 50% of their income on housing. That’s highest in the nation. Clearly this must be unsustainable. Yet what is the alternative? City close is where the jobs are. Sure, people will move out farther and commute, but that has a cost in time, productivity and money so many will choose high rent as the willing sacrifice. Owning is unquestionably the better scenario when compared to renting. While this isn’t always the case, at current rent levels, it surely is.
Consider for a moment a 3 bedroom apartment in suburban Thousand Oaks for example, where there’s decent employment, great schools and commuting distance to the major metropolitan centers, doable. You get a 3+2 with lovely wall to wall carpet, vinyl in the kitchen, not the nook by the way, white walls, fiberglass insert showers, Formica counters and no garage for $2,350 a month. Whaaaat!!!??? You think I’m kidding don’t you? I’m not. Oh and it was built in the mid 1970’s with single pane windows. That is somewhere roughly equivalent to a $400,000 house payment. Owning really is cheaper than rent. So when everyone goes out to buy, that will create vacancies and rents will come down accordingly right? In theory that might be possible but the reality is not everyone has the down payment, credit or income to afford a $400,000 home. So rents are high and likely to stay that way and that means continued attractiveness for home ownership from those who can.
Then there’s the demographics and specifically I’m referring to the aging Baby Boomers and the Millennials. The Boomers were the largest population group in American history (1946-1964). They are just now hitting 70 and have begun the very slow migration out of large homes and into one story’s and then assisted care etc. But as we live longer, Boomers too stay in their homes longer, many choosing to bring hospice in rather than move to some facility somewhere. This means that while they may be in the process of selling they are doing it slowly and then buying so the net change is really zero in terms of % change in home ownership. Simultaneously the long awaited arrival of the Millennials is finally upon us. Millenials (1982-2004) are actually a larger generation than the Baby Boomers, something economists and demographers never imagined possible two decades ago. For Millennials, housing formation has just begun, albeit later than any generation previously and this is creating new pressure on the lower end inventory, first time buyers and midsized homes in the “more affordable” sub $1M mark (Search available inventory here). So tell me, which of those two generational examples suggest demand is going to wane anytime soon? Try neither. Add to this the lack of construction from 2008-2012 during the Great Recession and the rise in population through immigration and birth rate and guess what? Lots of pressure on available inventory.
Then there’s the challenge of getting a loan. Not that it’s like it was in the Housing crisis, it’s not impossible today, but you have to be qualified. No ifs, ands or buts. In fact, the percentage of home ownership today in contrast with the 69% of 2006, is below 64%, the lowest on record. This is why we are not in a bubble. If we are feeling a shortage of supply and home ownership is at record lows, there really isn’t enough housing. Not enough close-in homes, not enough condos, not enough apartments. Sure there are areas like Detroit where there’s lots of vacancies and no jobs, but go to any urban center where there are jobs and you’ll find the same scenario over and over: inventory is tight. This is not to say that the cycle of boom to bust isn’t going to happen ever again, it always does to some degree when the economy slows and people lose jobs. But I don’t see a scenario where supply exceeds demand for at least 15 years. Not until the Boomers really do make their way towards assisted living and even then it will take another 15 years to work through that. That’s 30 years folks. Until then, expect tight supply and the trend of multiple offers to be the norm.