There once was a time that California provided ample opportunity for middle class families. While this might be the case in some small areas, the statistics show us that it is increasingly more difficult for middle class families to get by in the state. The massive amount of investor buying is merely a sympton of a growing disparity hitting many parts of the country. Money has been devalued due to massive levels of debt and big investors would rather have tangible assets versus holding onto cash. This is a big reason that for the last few years investors have aggressively deployed money into the housing market where in 2013, half of all sales are coming from “cash” buyers. While the economy appears to be improving it is clearly not a uniform recovery. If you use the stock market and home values as a barometer you would think everything is going great. Yet that is not really the case especially if you are middle class. Let us take a look at a few signs that highlight the continuing challenges for middle class families in California.

A land of renters

While the recession officially ended in 2009, since that point most of the boom in housing has come from hungry investors. In fact, California has had a net gain of 500,000+ renters while losing over 230,000 homeowners:

This trend has hit hard and we will see more data this month when the Census releases additional annual figures. Part of the above loss has come from households going through foreclosure. It is highly doubtful that in sought after areas of California a person with a foreclosure is going to stand a chance bidding against a liquid cash investor. There has been this discussion that somehow young Americans are poised to take the housing market to the next level.

Young savings rate

First, Millennials are not exactly in a solid financial position. Recent data does not look positive for this group:

Half of Millennials have yet to start saving. 42 percent say they are overwhelmed with debt (which is good news if they plan on taking the largest form of debt, a mortgage right?). And something that is very unique to this group, 64 percent financed their college degrees which many baby boomers did not (or if they did, it was a trivial amount during a time of real growing incomes).

This kind of evidence suggests that this upcoming generation will have it financially tougher than that of baby boomers that witnessed one of the hottest stock and real estate markets ever. It is also no surprise that many younger Americans are living at home in spite of what we are told about the economy:

“(Salon) America’s young people have been hit so hard by the crappy economy that they can’t even get out the door. A fresh study from Pew Research reveals that 36 percent of Millennials —young adults ages 18 to 31 — are still living under their parents’ roofs (this includes college students who come home for breaks). Not since the 1960s have so many young people resorted to couch surfing with mom and dad, a record 21.6 million young adults last year. This is a gigantic sign that something is going horribly wrong in our economy—something that will cost everybody.”

This is important to grasp since there seems to be an implication that younger Americans and Millennials are flush with cash and ready to buy homes in droves. In reality, many are going to have a tough time renting. Many are already saddled with massive debt and given the sky high prices of California real estate, is this group really primed to buy up all the future housing that will come online? Hard to say since the market is currently dominated by investors. If we think of middle class life as including homeownership, many Millennials are going to face an uphill battle here.

Poverty rate

First, it is important to define “middle class” since people put out nonsense that middle class means $250,000 of income a year. By definition, middle class is the median household income. In the US, this means about $52,000 and in California this means $57,000. This is simply data from the US Census. In fact, only 6 percent of California households make more than $200,000 (26 percent make more than $100,000). Since rising prices across many items eat into stagnant incomes, it is no surprise that the poverty rate in the state has increased even during this recovery:

The poverty rate continues to increase where we now have 3 million Californians on food stamps. Many of these people have fallen off the middle class ladder and are now struggling to get by. Rising real estate values and a rising stock market don’t necessarily trickle down to most middle class families.

California income

Income is one of the best indicators of a truly robust economy where wealth growth is being shared by most of the population. That is not happening this time around:



Adjusting for inflation, California households are back to levels last seen in the mid-1990s. This isn’t only a California trend but a nationwide one. What compounds this issue in California is the price of real estate. For example, in many parts of the country a starter home can go for $150,000 to $175,000 so even at $50,000 or $60,000 a year a household can get in and float this mortgage because of artificially low rates. Is that even feasible in California? Not likely but there are areas in the Inland Empire and Central Valley where prices may be inline but these prices have been pushed up courtesy of all the investor demand. For example, the median price of a home sold in San Bernardino County last year was $165,000 but now it is up to $205,000 even though incomes in the area have gone absolutely nowhere.

Home values

So you have to ask what is driving home prices up in the state?

This is being driven by investors, low interest rates, and a controlled level of inventory on the market (although inventory is slowly increasing). So it is hard to see how this is a benefit to the larger middle class in the state compared to investors and those locked into high priced areas already. I’m sure many of you know people and families that bought many years ago in target markets that if they were to buy today, would stand no chance of purchasing in their neighborhood. In fact, you can have one neighbor paying $10,000 a year in taxes while next door, someone is paying $2,000 even though they are deriving the same benefits from the government and local services. There are many nuts and bolts in California that create an environment where boom and bust are ingrained in the real estate market. So to think there will be no bust after this boom flies in the face of history.

California homeownership rate

One clear result of all of this is that the homeownership rate has fallen dramatically in the state:

The current rate of ownership in California is now back to where it was in the early 1990s. What use is it having low rates when this kind of market actually favors investors that come in with cash or other forms of financing and crowd out regular buyers? The big winners are the larger investors and banks. All of this data is showing a more bifurcated market where inequality is increasing dramatically. This is simply a fact. You even have foreign money flooding back into California in more desirable areas. Of course, much of this money is contingent on a booming stock market since the big investors derive their net worth from financial instruments more than real estate.

Multi-family permits

Big money understands this trend and that is why if we look at permits, you’ll notice that more multi-family permits are being issued in California compared to single-family permits:

Multi-family units are largely rental housing. Given that many younger Californians are simply unable to pay current prices, it is more likely that they will rent before they can buy. The middle class is shrinking in California and we are seeing a growing class mired in poverty. Some might be in their own little cocoon willfully ignorant of what is happening but the data is pretty clear. This real estate market is being driven by big money, not by a resurgence in the California middle class.

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