This is one of the most common “pickles” renters find themselves in. Rarely do we find that concern with homeowners, unless their circumstances change dramatically, or building equity in a home is not a concern and owning a home is perceived as a liability rather than an asset. You can read Rich Dad, Poor Dad or Think And Grow Rich for that ☺
To keep with the times and the current real estate market, especially in Southern California in areas like Santa Monica, Pacific Palisades, West Los Angeles, Beverly Hills and in growing adjacent areas like Venice, Culver City as well as Century City, Cheviot Hills, Rancho Park and Palms, it is important to understand what has been happening over the past couple of years.
Two words: Silicon Beach.
Yes, it’s happening, it’s not a myth. We all know of Silicon Valley and how it affected the housing market in the San Francisco, Bay Area, Berkeley and adjacent communities: prices have skyrocketed and the middle class has been pushed out. This goes for both rents and home values.
Silicon Beach, to keep it succinct, is Silicon Valley, but in Santa Monica. As the start-ups are slowly invading the beach cities, their very highly paid employees are driving the prices up by simply writing offers well-above the advertised asking price of homes or condos. Areas close to the beach, dining and entertaining, like Main Street, Ocean Avenue or around the revamped 3rd Street Promenade tend to be the most expensive and usually populated with young unmarried Millenials, or young couples without children looking to live in full-service condos/townhomes, or high rent apartments, without the hassles of home maintenance. Further East from the beach is Sunset Park, on Ocean Park, traditionally an area for single family residences (SFR’s). Those prices have been also growing at a fast pace, either for upper class families willing to buy a fixer, builders/developers who will tear down, rebuild and flip by either building another high end SFR, or a condo/apartment building.
What is happening right now is that middle class families without the assistance of affluent parents would need to come up with an extremely high down payment to keep their monthly low/affordable. We also have seen a lot of foreign all-cash buyers who buy homes or condos for their college-age children, and resell them once they’re done, for a profit.
Saving to increase that down payment doesn’t mean you will be able to afford a home in your first choice area next year, because in most cases, incomes do not match the housing market growth. What actually happens is that prospective buyers who do not buy now, for let’s say $1.2 million for a fixer-upper, will see the same fixer-upper in a year for $1.5 million! Those figures may not be accurate, but they illustrate the reality of what’s happening.
Buyers in those hot areas are faced with two choices:
1) Buy now in the desired area, even if it’s not their dream home, just so they can get their foot in the market’s door and trade-up as they save more over time.
2) Search for a home that matches their needs in a different area, while still being able to afford the payments.
What renting will do is price them out of the area for next year, as they will perpetually play a game of catch-up with the housing market. And in many cases, the cost of ownership is now lower than the cost of rent!
So, what are the advantages of owing? Equity. Asset. Owning something “real” (that’s why they call it real estate…) By owning, you are no longer working on saving up to buy. Yet, you are saving by spending less than you would on rent.
What about the housing bubble? Well, no one has a crystal ball, and while we can expect a bubble to happen at some point, even the most astute experts and observers cannot pinpoint what’s exactly going to happen. Loan rates are at an all-time low, lending guidelines are stricter than they were before the last housing market crash, and Southern California’s beach cities will always have a strong appeal for able buyers, as there is no shortage of wealth. The only difference is the gap it creates for the middle class.
If you look at option 2 above, you’ll find that certain areas not currently hot are becoming hot, as people are being pushed out further away. A good indicator is to look at the development of shopping areas offering the conveniences of shopping and entertaining of the highest quality and variety, near excellent schools. Those still relatively affordable areas are part of the next boom, so while one area may become saturated, another area will benefit from a solid housing market growth. Anything you may have traded (like proximity to the beach), you will gain in home value.
And I wouldn’t worry too much about a bubble: if you can get into a home for a price you can afford, you can always ride it out, as we eventually come out of the bubble. Look at where we are now. Yes, you can wait for the bubble, but it also doesn’t mean that that bubble will offer rock bottom prices. A drop in prices can be relative. Once again, no one has a crystal ball, but prices can continue to rise for another 2-3 years, bringing us back to today’s prices in a crash, where people may want to sell their homes for what they bought them. We are all hopefully a little savvier, having learned.