Yves here. The saying is that as California goes, so eventually goes the US. If so, its trends in home prices are sobering, with a rapid liftoff leading to a sudden air pocket. But even worse for the housing industry is the antipathy that young people now have for homeownership. On the one hand, the lack of interest may be a rationalization: why want what you probably can’t have? Young adults can look at income growth prospects. Unless they are in one of the looting professions like finance, they will probably conclude quite rationally that their personal upside is limited. If they are to buy a house at all, it probably makes sense to have a hefty down payment. The younger cohort appears to have wised up to the fact that 30 year mortgages and short job tenures with potentially long periods of unemployment in between are not a happy mix.
One the other hand, the attitude of young adults may also reflect another way in which workers face too much uncertainty to commit to buying homes: that of the need for job mobility. When I grew up, my family moved a ton. went to 10 different schools before college. That would have been impossible if my father had bought houses and been at risk for selling them. Even if they had held value or appreciated a bit, the transaction costs (closing, brokerage, minimal sprucing up) is typically 5-7% of the home’s price. If you have put down 20% equity, you are looking at losing 25% to 35% of your investment every time you move. That’s a fast path to penury.
Back in the more paternalistic days of Corporate America, my father’s first two employers provided housing (one was so mad when my father quit to go to business school at the advanced age of 35 that they tore down the house we had lived in and turned it into a parking lot). His next employer had a “make whole” arrangement every time it transferred my father (I was not the details, but this general sort of arrangement was common back in the days when IBM stood for “I’ve Been Moved”).
But those sort perks don’t apply when people switch employers, which has become common in the below 40 cohort, both out of necessity and for opportunistic reasons. So again, perversely, the neoliberal project to reengineer the economy to favor capital over labor has undermined demand for the biggest driver of business cycle growth, housing. Nicely played.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
This must be part of the explanation why home sales in the expensive parts of California, which is where most people live, are collapsing: according to a Harris Poll on behalf of electronic broker Redfin, 92% of millennials who don’t already own a home do not plan on buying one in the future. Ever.
These people, now between 25 and 34, are in their peak home-buying age. They’re the much sought-after first-time buyers. They’re the foundation of the market. But not this generation. Homeownership rate among them, according to the Commerce Department, already plunged from 41% in 2008 to 36% currently; as opposed to 65% for all Americans [Here’s the Chart that Shows Why the Housing Market Is Sick].
These folks are not “pent-up demand” accumulating on the sidelines, as the wishful thinkers have proclaimed.
“Millennials who flock straight from college to San Francisco and other expensive cities are making a choice to spend their income on quadruple-digit rents and eight-dollar gourmet hot dogs from trendy food trucks,” explained Redfin San Francisco agent Mark Colwell. “This means they’re not saving for a down payment, further removing them from the housing market.”
So Redfin checked Census data to find the 20 Zip codes in the country with the highest population of educated millennials. Median household income in these neighborhoods is 50% higher than in all ZIP codes. Median home prices are on average $255,000 higher as well. And the average down payment for homes in these neighborhoods is $80,000.
A down payment that is out of reach for most millennials. A new report about consumer finances by the Federal Reserve shows that the median family headed by a millennial earned $35,509 in 2013 dollars, 6% less than their counterparts in the Fed’s first survey of this type in 1989. Actually, median households headed by someone under 55 also made less than their predecessors in 1989 (this is what inflation does to real wages; FOMC members who’re clamoring for more, or any, inflation should read these reports from other corners of the Fed).
Many millennials, burdened like no other generation before them with student loans and making less money than their predecessors, are coming to grips with something important: they’re locked out of the American dream of homeownership for years to come. These are the hoped-for first-time buyers, and they’re not buying.
For a while, they were replaced by buy-to-rent investors. Armed with billions from Wall Street, they plowed into the housing market starting in 2011. Their relentless buying has ratcheted up home prices in double-digit increments to the point where these high prices make that business model too difficult. And these investors have been pulling back as well.
The results are not pretty.
In the nine-county Bay Area, homes sales in August fell 12% from a year ago. In San Francisco, they plunged 20%. CoreLogic DataQuick cited “affordability issues.”
And yet, the median price in the Bay Area rose 12% from a year ago. In Alameda County, the median price jumped 19%. In San Francisco, the price rose 14% from a year ago to $940,000.
But wait…. That $940,000 in San Francisco, that’s down from $991,000 in July, and down 6% from the cool all-time high of $1,000,000 in June, and down even from February’s $945,000. Something is going the wrong way.
In Southern California, in the six-county Southland, sales dropped 7.7% in August from July, though they normally rise on average 3.7%. Year over year, sales plunged 19%, the worst August in four years. In Los Angeles, sales plummeted 19%, in San Bernardino 21%, in Riverside 23%.
“Affordability challenges” and investor purchases that had been reduced to “the lowest level in several years” is how CoreLogic DataQuick explained the phenomenon.
But the median price in the Southland rose 9% year over year, jumping 13% in Riverside and 14% in San Bernardino – the two counties where sales had gotten pummeled the most. Go figure.
“Prices are high enough to be a hurdle for a lot of potential buyers, even though mortgage rates have fallen in recent months,” said DataQuick analyst Andrew LePage.
There was a twist: sales of homes over $500,000 inched down only 0.6% from a year ago. But sales of homes below that dropped 16%; and sales of homes below 200,000 plummeted 36%. Turns out, prices at this level have been pushed out of reach for buyers in this category.
Purchases by absentee buyers – mostly investors and some second-home purchasers – dropped to a 23% share, down from the January 2013 peak of 32%, and the lowest since December 2010. Cash purchases plunged to a 24% share, down from the peak of 37% in February 2013, and the lowest since January 2009. Are the Chinese suddenly staying away?
This disconnect between plunging sales and soaring prices is precisely what happened when the prior housing bubble peaked. Sellers are the last to accept the trends as they cling by their fingernails to some notional value of their home and to the tens or hundreds of thousands of dollars in wealth that they thought they already had in their pocket, only to see them evaporate.
They’re finally getting the message, explained Paul Reid, a Redfin agent in Temecula. “A lot of what we’ve seen over the last six or eight weeks is people lowering their prices to get buyers in the doors.”
Orange County, the most expensive market in Southland, is leading the way: about a third of the asking prices have been cut. The dream is over: the price bubble that lasted for two years and that peaked in June with a year-over-year gain of 28% – even as volume was already plunging – has popped.
While a lot of sellers are cutting their asking prices, others do what sellers did when the last bubble began to implode: they pulled their homes off the market for a few months, hoping for better times.
“They feel the price can’t go anywhere but up,” explained Steve Shrager, an agent with Coldwell Banker. Which is like so 2006. “I don’t want to use the word correction,” he said, “but we’re in a bit of an adjustment period right now.”
Everything will eventually sell. It will just take some time, maybe a lot of time. And it will require some price cuts, maybe big price cuts. And maybe, just maybe, if prices fall enough, more millennials have a chance to chase after the American dream.
But for the few people who can play in that rarefied air, there’s a sweet spot: homes above $15 million. Read…. ‘Wealth Effect’ Kicks in: Luxury Homes Are Hot, Rest of Housing Market Gets Hosed