I started writing about a California housing bubble before the Presidential debate. One of the candidates mentioning the idea of a bubble during the first debate and this newsletter are completely coincidental. Now that the concept is in the collective consciousness of the country will this become reality?
The answer is YES, we are in a housing bubble in California. We are in a housing bubble because we are always in a housing bubble cycle in California. It’s not going to change unless we have a significant shift in global policy. We need to have more jobs than people to fill them.
Since 1800 when the United States first started selling off California land to private citizens, we have had eight significant housing bubble busts. The following dates are approximations of these boom and bust cycles: 1849 Gold Rush ; 1865 Civil War; 1873 Stock Market hits bottom; 1893 again Stock Market hits bottom; 1929 the Great Depression; Stock Market implodes; 1974 Stock market crash; 1987-1992 World-Wide stock collapse; and we all remember the foreclosure crisis of 2008.
Between 1938 and 1973 we had 35 years of middle class growth and genuine prosperity. We will likely never see this again.
This is the economy we allowed to be set up. We are always either booming or busting…
Our economy should be more stable but it isn’t. Don’t worry. Take action by planning and protecting yourself by buying smartly. Buy investment assets that pay for themselves with responsible financing.
When securing a loan remember: if it’s too good to be true, it’s too good to be true! Live within your means. Don’t carry credit card debt.
Interest rates will go up and raising rates will decrease affordability. It won’t matter who the next POTUS is because interest rates will be going up under their watch. We will see increased foreclosures during this time; and it will be a calculation between how many homes can be lost against the need to raise rates. Raising interest rates too quickly will decrease home values. We won’t see a significant devaluation in home prices as long as the interest rates are raised slowly. The best case scenario is a flat market. Many parts of the country seem to mostly be flat with modest growth. California with its pioneering spirit is not so linear.
Ideally mortgage rates would be between 6 and 8%. This means interest rates need to double. Doing this overnight would create worldwide panic and a global economic collapse. The ideal time to raise rates would be when the economy is very strong. Raising interest rates on real property purchases makes a larger economy by creating more debt secured by property. Many people live off the interest of our debt. 8% interest pays people better and creates more jobs than 3.5% interest.
California recently surpassed France as the sixth largest economy in the world. The move is due to Silicon Valley and Hollywood. Surprisingly, agriculture and manufacturing were strong contributors to our economic growth, as it is well known these industries are shrinking. The cost and lack of water is killing agriculture and manufacturing is burdened by high labor costs, excessive regulations, high taxes and cheaper costs overseas.
California is the nation’s leading producer of almonds, avocados, broccoli, carrots, cauliflower, grapes, lettuce, milk, onions, peppers, spinach, tomatoes, walnuts, and dozens of other commodities, according to a 2012 Department of Agriculture report. The state produces one-third of the U.S.’s vegetables and two-thirds of nuts and fruits each year. While fields in other agricultural states like Iowa, Kansas, and Texas primarily produce grain, pretty much all other food is grown in California. The United States can’t eat without California. What will happen when we run out of water?
But as our changing drought ridden climate continues to desiccate California’s Central Coast, the short-term solution from farmers has been to double down on making money and maximizing production. It’s a difficult long term model because there isn’t enough ground water.
California needs to figure out its agricultural water issues to stay competitive with foreign growers and to not contribute to a long term economic downturn. A Desalination pipeline from the ocean to the central coast is a solution, but an extremely expensive one.
A 50% decrease in home values seems excessive but in 2009, 70% or more was common in Stockton, Palmdale, Lancaster, Victorville and many other locations. A family member refinanced her Palmdale, CA, home in 2007 with an appraised value of $325,000. She gave the house back to the bank and it was sold as Real Estate Owned (REO) for $70,000 in 2009. That’s a 78.46% loss. The Los Angeles district of Venice a seedy seaside oasis was the only area of California I am familiar with that did not experience a down turn in values during this time period.
In regards to apartment buildings of five units and up: sales during the foreclosure crisis of 2008 and my personal experience, which will not be representative of the entire state, sales got very slow but prices did not roll back in the Los Angeles market including the immediately adjacent prime sub-markets. However, the availability of financing got very tight. Some owners were heavily leveraged and cross-collateralized and did lose a building and others were forced to sell quickly to save other assets. The apartment market was affected by the housing foreclosure crisis, but minimally in my opinion. Many were expecting a commercial REO onslaught that never came. Apartments in growing California are always a good investment. The California Department of Finance is expecting our states population to swell to 44.1 Million by 2030. That’s a 5.3 Million people increase.
Where will they live? We have a housing shortage.
The boom and bust cycle supports those with deep pockets because it gives those with large amounts of cash the opportunity to buy at bargain prices. We see massive consolidation: Washington Mutual becomes Chase; Bank of America acquires Countrywide Mortgage. With each illusion of recovery the middle class gets smaller and the dollar buys less. Many never recover.
The California real estate economy booms when money is cheap and lent liberally as it is now. It busts when the beneficiaries of the cheap, low and no down payment real estate loans fail to pay their mortgages. Lender’s current underwriting standards are much stricter than they were leading up to the Recession in 2008. Interestingly, “stated income” loans are back, but instead of zero down payments like before, they require a 25% down payment.
The availability of low down payment Cal-HFA and FHA Loans are wonderful because they allow us to buy primary residences and get our piece of the rock. However, with their super low 1 to 3.5% down payments, I sense they will be the first to fail in the next downturn because it’s so easy to walk away.
Our next recession will not be nearly as bad as in 2008, but it will result in a dip in the market. While I am unsure of exactly when the next bust will come, I encourage those wanting to buy and re-finance real property to make smart choices and consult an experienced realtor. Call me for a chat; I would appreciate the opportunity to earn your trust and your business.
Do you agree with my thoughts on bust and boom? What do you think will happen to the real estate market in California? Share your thoughts at: