The American Dream has included the expectation of a good job, getting married, having 2.3 kids, owning a home with a white picket fence and retiring comfortably with a pension, pretty much since the end of WW2. And for the ensuing 20-30 years the course of our lives followed this predictable plan, with the occasional bump in the road brought on by wars, incursions and the inevitable social upheaval that followed all of this.
In spite of myriad social changes like when “free love” reigned, bras were burnt and micro mini-skirts caused many fathers’ heart failure, the line of status quo held strong – that is until the 1990’s when the edifice of our way of life started to show serious signs of wear. When outright recession hit home in 2008, we reeled from the unexpected blow to our way of life.
Our American Dream did not emerge unscathed.
It’s noteworthy that buyers’ relationship to homeownership has been impacted by this change in status quo, too. The stigma of renting and not owning is gone. Pride of ownership is truly passe.
Historically we hid our financial woes under stiff smiles and a facade of prosperity. It was socially unacceptable to appear “less than”. All this changed when the world was brought to its knees in 2008. People began to speak openly about losing millions of dollars in cash or equity. Boasting about how much we acquired was replaced with one-up-manship about how much one had lost. We were suddenly all in the same boat – except for the ultra rich. And even some of them took advantage of the mortgage crisis to negotiate short sales on their mega mansions, walking away from millions in mortgage debt. It simply made sense.
Presently, home prices have appreciated conservatively in spite of radically limited supply and consistent demand. And mortgage interest rates now swing far less wildly thanks in part to technology baking future predictors of volatility into anticipatory bank pricing decisions. Yet even with far less volatility in net housing payments, buyers are not responding to what would have before been viewed as a “no brainer” buying opportunity.
They’re waiting for something.
Jobs and wage growth are strong and our local population continues to grow, causing housing demand. Yet very few affordably priced housing units are being built and Boomers are content to age in place, which continues to limit supply. So what gives?
Millennials are now the largest segment of the buying population, outnumbering the massive Baby Boomer generation. And apparently, just as this generation views job stability through a far different lens, changing jobs every 1.5-2 years, they also expect market conditions to change regularly. But they aren’t. At last not real estate, which has been mind numbingly dull in its consistency.
If I had a dollar for every Millennial who said that they were waiting for mortgage rates and or home prices to fall again, I’d be stupid rich. Fortunately they appear to be shaking off their stupor and entering the fray, only for many to find that they missed their chance. Prices and mortgage rates have steadily plodded upward making qualifying for the loan their friends got in recent years a present day impossibility. They missed the sweet spot, when both prices and interest rates were low.
Because these youngsters are also postponing marriage and building families, they are less likely to have dual incomes to qualify for a home purchase, further delaying the purchase process. Lower cost areas with significant employment opportunities, like in southeastern states, are benefitting from the groundswell of singles who can afford homes there. It’s a lot more difficult for single buyers in California.
Additionally the recent tax code changes limiting SALT deductions, which most greatly impact high cost areas like ours, is not helping. For most of OC’s middle class, buying property for a primary residence no longer makes fiscal sense. It’s more cost effective to rent where you intend to live and invest in other ways, including lower cost real estate. The result is that we have far more renters than ever before.
Enter the new Landlord centric economy.
I predict it’s here for at least the next 10 years. Here’s why.
The ratio of homes sold to owner occupants understandably surged after the meltdown when prices hit rock bottom. Homes became affordable again – at least relative to prior highs. However, now that values have stabilized and the cost to build new homes here has become unprofitable for builders, there is precious little affordable housing to buy. Many locals are forced to rent near their places of work, school and other determinants. Fewer buyers are willing to live in the low cost neighborhoods they can afford, opting instead to buy there and rent them to others.
Even though income tax code changes are making owner occupied homes less financially relevant, tax savings are still attractive for savvy buyers willing to make a business of being landlords. And they are diving in.
2019 YTD 28% of all residential sales were to non-occupying buyers – the highest rate seen in decades.
Historically, investor buyers averaged between 16 – 22% of all sales. The majority of today’s buyers are regular individuals, not institutional or foreign investors.
This is far more consistent with commercial properties, which are defined as those having 5 or more living units.
As with any product, when fewer people control more of anything, they set the prices. It makes sense to expect rents to continue to rise as landlords focus on their own bottom lines. And if rents do continue to increase as they already have it will only compound the challenges would be buyers face trying to save up enough cash for a down payment.
Unless and until there is another marked shift in our local economy, we can expect fewer people to be able to afford homes and the divide between renters and owners to grow, much like in Europe. For example, only slightly more than half the residents in Germany and just under two thirds in France and Sweden own their homes.
The average rent paid in OC has steadily increased since 2005.
Even in the face of the financial annihilation of 2008-9, rents didn’t fall nearly as much as home values did and they rebounded faster. The investors who opt in to being landlords now will see both equity appreciation and tax savings from their investments, enabling them to purchase additional rentals. Future buyers will be competing with these investors for the lowest priced homes. It won’t be easy.
So if rising home prices and reduced tax incentives have you rethinking buying a primary home, I encourage you to get on board with buying rental property instead – and soon. Professional property managers can do the heavy lifting if being a landlord is not your thing. Over time, these investments will certainly pay dividends.
Call me for help crafting your new real estate strategy.