A lot of people do not equate California with poverty. You certainly don’t think of poverty when you look at real estate values in places like San Francisco even though the homeless issue is right in your face. The reality is that most people do not live lavish lifestyles. In fact, a new report highlights that more than one-third of California households have virtually no savings. These households would not have the ability to live at the poverty level for three months if one paycheck in the household was lost due to a job loss. You also have more than 2 million young adults living at home with their parents since the rent is too high. This isn’t the California that is presented in Hollywood movies.

California and the evaporation of the middle class

The reality is, the middle class is slowly disappearing in California. There was a time not long ago when a blue collar worker was able to purchase a home in many California locations. But there has been an aggressive gentrification. Now many people feel it is necessary to go into big debt simply to purchase a crap shack.

Here is the map of the study:

“(Pasadena Star News) Lars Perner, an assistant professor of clinical marketing at the USC Marshall School of Business, said California’s high housing costs have put many households on shaky financial ground. “The cost of housing in California is exorbitant,” he said. “That’s a big part of the problem. People pay a disproportionate amount of their income toward housing.”

In places like Los Angeles close to half of renting households send close to half of their paycheck off to rent. And for the majority that own they spend over 40 percent of their net income on housing costs. This provides very little buffer for any emergencies. And of course, people live day to day and the economy has been on a massive bull run since 2009. A small recession is going to cause major ripples. And the way California is structured supports a boom and bust economic cycle. Tax revenues are flush in good times thanks to high taxes across the board but when things contract, the money dries out very quickly.

And inventory is down across the United States:



Housing inventory across the US is down 12 percent year-over-year but in Los Angeles, it is down 26 percent from an already low level. So for those crap shack hunting house lusting couples, they are simply biting the bullet and buying. Of course they are buying when everything is rosy and assume there is no correction on the horizon.

It is interesting that this shrinking of the middle class is happening virtually in all major metro areas. My view on this is that this is being accelerated by technology. People all want the same things across all areas: Amazon Prime, Netflix, Gyms, Whole Foods, Uber, etc. So what happens is that lifestyle choices are more standardized across cities because of technology so people push real estate values up in similar herd like trends.

But it is troubling to know that 37 percent of California households are living on the financial edge. And this is a figure that comes when the economy at least on paper looks good. What happens when you get your inevitable pullback in the stock market and real estate?

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