People are surprised to hear that Los Angeles County is the most unaffordable location in the entire United States when it comes to renting.
Isn’t San Francisco or New York more expensive? Of course they are, but affordability is based on income, and Los Angeles has a much lower household income base to draw from. Unlike creative mortgage financing, you actually need to pay your rent out of your net income each month. What has happened since the housing bubble popped is that more families in Los Angeles are now renters and rents have soared causing a rental Armageddon in the area. Families are being squeezed in what I would like to call housing purgatory. They have no way of buying an inflated crap shack but at the same time are unable to do anything about rising rents. For those with Taco Tuesday baby boomer parents, many Millennials are opting to move back home. And builders realize this trend is only going to continue, and that is why builders are going after multi-unit permits at a much higher rate than single-family permits. Los Angeles County is now becoming a renter’s paradise assuming you like cramped living areas, high traffic, and sky-high rents. I don’t see permits for new freeways coming online at the rate of multi-unit permits.
The rental revolution continues
First, let us back the assertion that Los Angeles renting households spend the largest portion of their income on housing. The figures show a very clear picture:
The majority of renting households in Los Angeles spend at least 50 percent of their income on housing. That is simply insane and gives very little room for saving for retirement or even for a financial emergency.
Of course, San Francisco has higher rents, but again, households make more, so this metric is relative. And what is more important to note is that Los Angeles County with 10 million people is a massive micro-universe of what is occurring across other areas of the country. The vast majority of those in the county rent. Today with creative financing, low down payment loans, and crap shack inventory out there people have the option of buying. But they are not in large overarching trends. In some places, the big demand is from investors, domestic and foreign. We’ve done deep analysis of streets in Culver City and Torrance and what you find is the vast majority of people living in these hoods have no chance of affording their own home today if they had to buy. So the few home sales that go through suddenly set the market. This goes both ways of course.
But builders have to build for the trends of tomorrow based on what they are seeing today. And in Los Angeles, they realize a renting paradise is unfolding:
Multi-family unit permits are beating out single family permits almost four to one. Compare this to 2004 and 2005 in the bubble when they were nearly one to one. Ultimately builders are looking at the underlying economic trends and realize that more people are simply going to rent. Pressure on higher rents is coming from demand and the lack of supply. Sure, you can be one of those mega-super commuters that drive in from the Inland Empire, but your quality of life is going to be horrific. Yet, people make economic choices and millions make the commute from the Inland Empire into L.A. or Orange County just so they can own a McMansion.
There are four rules of thumb you should adhere to if you plan on buying a crap shack:
Your mortgage should only eat one-third of you net income per month
Anticipating any changes? If you have a child, is daycare going to be an impact? In many crap shack areas daycare can run up to $1,500 a month (or more)
Planning to stay for 10 years? Then you would likely ride out any bumps in the road
Do you have at least 10 percent down (ideally 20 percent down)? Don’t buy without an emergency fund in place
Yet, even with these simple metrics in place, people are just not buying in mass because first, inventory is also tight and many local families are broke or can’t compete at these prices. So if you are part of the house humping brigade that crap shack is getting more appealing to you. I was talking with a few colleagues in the industry, and they were saying for the last year or so it has become more common for people to wave contingencies like not having the damn place inspected! What if the place is termite invested, or has asbestos, or has major problems with the foundation? These are expensive fixes. But who cares right! Housing only goes up. Builders look at balance sheets and household economics and realize there will be more demand for renters even though the housing cheerleaders want to make it seem like there is a giant amount of people waiting to buy in the wings. The facts don’t show this. So what we have is Los Angeles becoming more and more a renter’s paradise with the most unaffordable rents in the entire country. You wonder why traffic is getting worse? Housing density is only going to get worse.