When it comes to real estate, California seems to push things to the extreme. When the nationwide market was booming California was booming with even more bells and whistles. When things went bust, we went down like a boxer with a glass jaw. Now with housing values going up, some areas are having bidding wars and a touch of mania buying. Expectations are always hard to manage and people adjust their expectations based on their small circle of influence. For example, the median home price in Southern California peaked at $505,000 back in 2007. Today the median price is $309,000, a 38 percent drop even in the face of incredibly low mortgage interest rates. Yet many want to buy their homes in tiny niche markets chasing the hot money and hipster vibe. If you can snag a home with a $250,000 mortgage at a 3.5 percent mortgage rate your monthly payment might be lower than a comparable rental in L.A. given the jump in rental prices coming from investors and lack of inventory. Yet overall, many still cannot buy because of the weak employment market. The young have certainly not pushed the housing market up recently. They are dealing with student debt the size of a mortgage in some cases.

Moving in with the parents

Contrary to the mania occurring in some markets, home prices have fallen significantly and pulling up modestly from the trough. Of course this reversal is occurring because of the Federal Reserve and banks leaking out inventory selectively. Yet the trend for young Americans is unmistakable when it comes to housing:

The homeownership rate for those under 35 is heading back to levels last seen in the 1980s. The percent of those between 25 and 34 living at home is reaching record levels. This is an important trend to recognize because it highlights that many of these people are not seeking rentals let alone out in the market to buy a home. Do you think higher rental prices will pull these people off the sidelines?

In California some are only focused on their niche situation. They try to justify a timely purchase/sale or complain against certain policies while they send their spouses off to subsidized state colleges. In other words they leech off the system as long as it is a benefit to their own cause and disregard that higher rents for example that are harming younger Americans because of these policies (i.e., controlled inventory, selling bulk property to private equity investors, etc). They like to believe that they are participating in some sort of open market but that is clearly not the case. It is a clear example of what Nassim Taleb describes in his Fooled by Randomness book. That is, they lucked out but like to think it had something to do with their own skill set.

I’ll give you an example. There is this person in their 50s with two kids in their 20s. He was fortunate to go to a California state college when it was practically free but now, his kids who have average grades are shut out from many of the competitive majors. They want to go to a private school that will cost roughly $50,000 for year. It is that or try the community college lottery where classes are being slashed. With a liberal arts degree he was able to land a good job and made a career out it. He is bitter now about his kids not getting in. The kids meandered for a few years working odd jobs and now realize it is necessary to get a college degree. A liberal arts degree like his will not do them much good in this job market especially at the private school cost. At the same time, this parent is furious about paying one more cent in taxes even though this is how his education was funded! This is a very common California mentality. Expecting a Mercedes-like system on a used Chevy budget. The kids currently live at home and are likely to go to a private college. I’m sure this story is playing out over and over with many baby boomers across the country.

Let us look at rents. Rents are going up in SoCal yet incomes are not:

People try to act as if this is some sort of open market. It isn’t. We suspended mark-to-market accounting to benefit the banks and here we are having the Fed purchases billions of dollars a month in mortgage backed securities simply to keep interest rates low. The Fed is trying to pick winners and losers via monetary policy so those that think that they can plan a purchase or a move based on some kind of market timing are simply entering a guessing game. But know this; household incomes are not going up.

The employment situation

I saw this article on CNN Money this weekend about the employment market in Los Angeles:

“NEW YORK (CNNMoney) — The unemployment rate has been falling lately in Los Angeles County, but not for the right reasons. Last month, the jobless rate for the county fell to 11%, down from 12.4% a year earlier. While that’s far higher than the 8.1% unemployment rate for the nation as a whole, it nevertheless seems to show progress for the City of Angels… right? Wrong. In Los Angeles, the falling unemployment rate is slightly misleading, just as it has been for the country overall. When surveyed by the government, fewer L.A. residents say they’re unemployed compared to a year ago. But it’s not because they’re finding jobs. It’s because they’re dropping out of the labor force altogether.”

This is incredibly important to understand. We are entering demographic headwinds and the way employment figures are calculated, the headlines can be very misleading. People are back to buying homes in some L.A. neighborhoods as if no bubble even occurred and are even going into bidding wars like folks wrestling over Tickle me Elmos over Christmas. Take a look at the employment figures for LA/OC:

The chart is actually helped by the OC employment figures. In Los Angeles County for example, we have the same number of people employed today as we did back in 1990. The difference is the population has increased:

As carmageddon is reminding us we are a massively dependent car culture here. Many that work in Los Angeles don’t necessarily live here. As the previous article reminds us:

“L.A. has hot industries, but those people may not live in Los Angeles,” Levy said. “They may live in surrounding areas like Orange County.”

So you have these odd sort of trends all coming together at once. Even the Los Angeles County median price is at $335,000. Of course many want to live in handpicked neighborhoods chasing after hipster money and pent up demand mixed in with a dash of hysterical mania (after all, who calls a routine freeway closure carmageddon?). Don’t forget that nearly 27 percent of all SoCal purchases are financed with easy money FHA insured loans that only require a 3.5 percent down payment. So for that median $335,000 home all you need is $11,725. Like I discussed before, many have it in their mind that they are somehow missing bubble version 2.0 and are not going to let it slip by this time. Goodness gracious they are going to get a seat in this musical chair sequence! So you have a rush into the market in 2012 and massive government intervention combined with banking accounting magic. Ultimately this is more of a narrative of what is occurring because when the government is the housing market trying to act as if this was some sort of open market is naïve.

Yet the bottom line is household incomes are stagnant and the cost of many items like sending your kids to college has gone up dramatically. You might not pay for it in one sector but you will pay for it in another. For all those buying homes in these areas with kids hopefully they are setting money aside for that expensive private school education down the road. Did we mention that college costs are increasing at rates higher that home prices did during the bubble?

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