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The New Real Estate World
NEW REAL ESTATE ENVIRONMENT
COMING INTO FOCUS
The look and feel of the American residential marketplace has been pretty consistent over the previous three-quarters of a century. Young people join the workforce and shortly thereafter seek to buy their first home. Renters save up to do the same. In a few years with growing families and/or improved financial situations they buy up. Occupant home owner-ship rates continue to climb. Home builders rapidly construct to meet demand. And investor landlords focus on multi-family units and apartment buildings.
Well, many of these axioms have been called into question in the years since the most recent recession. And while one highly-publicized change related to the millennial generation turned out to be a myth, other recent developments have passed the point of a being short-term anomalies and now must be considered the new reality.
Housing Shortage is Nationwide, and in California, it will be here for Decades
Supply will rise to meet demand, correct? Well, perhaps not if the demand is for a product that is based on a limited resource (land) heavily regulated and restricted by state and local governments.
If you are a realtor or buyer, you might as well stop complaining about low inventory. What we are experiencing now is how it will be for a very long time.
New construction has simply not kept up with population growth. The California Legislative Analyst’s Office estimates that new construction has been 40 to 50% of that which was needed to eliminate housing-shortage-caused price inflation since 1980.
State government now recognizes the long-term cost of efforts to slow growth which started to significantly impact housing construction in the 70’s. While California housing prices have been historically higher than the national average, the difference remained steady at 30% from 1950-1970. But beginning in 1970 this price differential skyrocketed, to 80% by 1980, and now sits at 250% of the national average.
The result is that home ownership is out of reach for most first-time buyers in the state, which means that there will be a steady supply of renters. And the housing shortage will function as a firm foundation supporting value and appreciation. To whom do you think this situation appeals?
Investors of all Shapes have Moved In, and are Here To Stay
Residential real estate (1-4 unit) has traditionally been owned by individuals and small partnerships. However, large investment groups and institutional entities became interested in this market after the bursting of the housing bubble, but were thought to be temporary bottom feeders.
Now that we are approaching a decade after the beginning of the Great Recession, it is clear that investors of all types are attracted by those conditions outlined above, and have taken up permanent residency in this arena. Even house flipping is now big business on Wall Street. And because of the scarcity of land to develop, even single lot owners, who might have been approached in the past by an individual builder or small developer, are receiving offers from large corporations and real estate investment groups. And most individual investors, who might have previously focused on stocks and bonds, now consider rental real estate as an essential part of their portfolio.
Foreign Buyers Acquire Record Number of Homes
It is not just American investors who think residential real estate is a good bet. Foreign buyers purchased more homes in the most recent 12 month survey period (April 1, 2016 – March 30, 2017) since the survey began in 2009. (The fact that investor and foreign interest in residential real estatehas only recently been monitored is an indication of how much the market has changed.) While China placed new restrictions on the movement of money out of the country, and the rhetoric surrounding the 2016 presidential election was expected to cool interest in investing in the U.S., dollar volume of foreign purchases increased a whopping 50% from the previous year to $153 billion. Chinese buyers accounted for the biggest chunk at $31.7 billion. But coming in second and showing the greatest increase were Canadian buyers who more than doubled their U.S. home purchases to $19 billion.
Florida, Texas and California are the primary targets for foreign buyers, accounting for half of all purchases. Europeans, Latin Americans and Canadians have been focused on Florida, while buyers from Asia and Oceania are the most active in California.
Surprise, Surprise! Millennials Really do Want to Own a Home
It was big news when it was reported that, unlike previous generations, owning their own home was not high on millennials’ wish lists. In fact, it might not be on their lists at all. As a result of watching their parents suffer the loss of equity, if not their home, in the Great Recession, or as part of the new sharing/“don’t own” economy, or perhaps as part of a generation-wide rejection of materialism altogether, millennials supposedly were not interested in weighing themselves down with home ownership.
According to recent polls this generational shift has turned out to be a myth. While millennials are buying later in life than previous generations, over half of millennials over the age of 25 own their own homes now, and over 80% of those that don’t, want to.
Non-owing millennials do face a challenge as over 40% have not saved for a down payment, many are carrying student loan debt, and millennial earning power trails their
predecessors (they are earning 20% less than boomers at the same age).
But perhaps the most surprising thing is the reason this generation wants to own their own home. According to recent surveys, 33% of millennial homeowners state the reason they bought was to have a better space or yard FOR THEIR DOGS. Dogs came ahead of marriage and babies as motivating factors. (To be fair, dogs were #3 behind acquiring more living space and building equity.)
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http://chrishendricksfinance.com/
EMAIL: chris@chloan.com PHONE: 818-665-6066
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