Sunday, April 30, 2006

"In California, the Starter Home Market has Really Disappeared"

"In California, the starter home market has really disappeared".

That statement definitely rings true in the Bay Area. How sad is that? How long can that continue? It implies that the starter home market, which is the first rung of the 'move-up' ladder, is now totally dependent on debt for its existence.

Like this article says, the thing that has been saving people time and time again in recent years, and that has allowed them to take on such massive amounts of debt and feel like they don't have to worry about it, is the market itself. As soon as the market turns flat to negative people will learn the hard lesson of debt. And now that the bankruptcy laws have been tightened that will be a very hard lesson indeed. What happens to the Bay Area housing market as a whole when the 'starter home market' totally disappears because either no one in that market can get a loan or they're too afraid of debt?

This whole thing is so out of control it isn't even funny.

Some choice quotes:
"In California, the starter home market has really disappeared," said Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."

Younger adults are struggling to make ends meet, Draut said, because many have student loans and start with low wages, which make it hard for them to save and build wealth.

"Definitely, this generation has resigned itself to live in debt to live in a middle-class lifestyle," she said. Many consumers are comfortable with debt, but too much debt leaves people vulnerable, living paycheck to paycheck.

Some homeowners take advantage of rising property values to take on more debt and use the influx of cash to pay other debts, such as credit cards.

"The market keeps bailing people out of trouble," Lawson said. "Because people don't really get in too bad of position, they never really learn the lesson, and a year later they turn around and get themselves in the exact same spot."

"The concern is how do we keep our middle class with the housing costs going so high?" Gruen said. "Will people move from California if they have the option? Yes they will."

"The only thing that's keeping me here is my family," he [Peabody] said.

Peabody would consider moving to another part of the country where living is more affordable if he could land an appealing job.

Other people are wedded to living here regardless of the price.
A significant market decline is the only healthy way IMO to restore normalcy and long term prosperity. Anything less than that is likely to be an artificial and ultimately ineffective intervention that will only make matters worse. Let's hope the 'man behind the curtain' can see that. And yes, for the record, I will be hurt just as much as anyone else but it's still the truth as far as I'm concerned.


Blogger Marinite said...

Thanks to Athena of the Sonoma Housing Bubble blog for this post's graphic.

Apr 30, 2006, 11:56:00 AM  
Blogger rejunkie said...

Younger adults are struggling to make ends meet, Draut said, because many have student loans and start with low wages, which make it hard for them to save and build wealth.

This is such a broken record. They were saying that about my generation ("X", if you must know) when I graduated college in the early 90s. This is nothing new, and somehow we all learn to overcome it. I joined the workforce after the last RE bubble burst and during the worst recession since the Great Depression -- anyone remember 10% unemployment in CA in the early 90s? With bachelor's degree in hand, I was seriously considering a career at Chevy's because I had no choice. I don't know anyone today, in their late 30s, still struggling. Oh yeah, the moving vans were all heading out of state back then too (to Seattle, mainly). Today's situation in CA is neither a crisis, nor anything we have not seen before.

However, it would be nice if it did not keep happening.

Apr 30, 2006, 7:50:00 PM  
Blogger rejunkie said...

I recieve emails on the rental market from, a Novato-based firm that measures the health of various rental markets in the western US. They rely on the big, commercially-owned apt. complexes for their survey data but it is the only rental trend information I can find. I would link to their site for these excerpts but they have not yet posted it. There are some data showing continuing firming of the rental market in SF:

First quarter data released by RealFacts on April 15 reveals that market stability has consolidated in several markets, and spread to new markets outside of Southern California. The "perfect balance" point of 5-6% annual rent increases and 94-95% occupancy is now well established in the Los Angles and Inland Empire MSAs, has consolidated in the Las Vegas and Phoenix MSAs during the last year, and has spread to the Seattle, Reno/Sparks, Oxnard/Ventura, and the San Francisco Bay area MSAs in the first quarter of 2006.

Realfacts goes on to state:
Joining the "perfect balance" MSAs this quarter are Seattle-Tacoma-Bellevue with annual rent growth of 5.4% and occupancy of 94.5%, Reno-Sparks with 4.7% and 95.1%, Oxnard-Thousand Oaks-Ventura with 5.3% and 96.0%, San Francisco-Oakland-Fremont with 5.0% and 95.4%, and San Jose-Sunnyvale-Santa Clara with 5.8% and 95.9%.

Note: 5% rent increases in SF, 5.8% in San Jose. This is just the beginning of significant and long overdue rent increases in the Bay Area.

Rents have gone down in the past 6 years largely because anyone with a pulse and willing to lie about their income has bought a home already. While I thought we would have reached this point 2 years ago, easy money has extended the bull run longer than even I had expected, and I am pretty bullish on RE

To other RE investors reading this, I think these are encouraging signs that improving cash flow will help compensate for the lackluster capital appreciation we can expect for the next 8-10 years (IMO).

I think if you are not yet a homeowner, the smart money is on signing a long lease (3 years if you can negotiate it) while rents are low (roughly 50-60% of the cost of owning) and waiting for prices to drift back down (in real terms) to make the move to buy 5 years or so down the road.

May 1, 2006, 12:30:00 PM  
Blogger fredtobik said...

I think a smarter way to approach this is to prevent the same thing from happening again, not a "significant market decline", people need to know the true value of money. It should be taught at an early age by schools and parents, it is so important in this world, that not having this knowledge is a definate handi-cap regardless of your "social class" or age.

This can also be described through social darwanism, you know the old dumb people raise dumb people type of thing, but that is for another blog.

May 1, 2006, 4:43:00 PM  

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