“(SF Chronicle) In their study, they took a data sample of over 100,000 listings that were listed for sale during 2009. They evaluated the selling price of homes that had pictures taken with a simple digital point and shoot and compared them to properties where the listing photos were taken with a digital SLR (i.e. the bigger cameras with the changeable lens that professionals and serious photographers use). What was the result? Homes that had higher quality or professional photos taken got a higher selling price – between $934 and $116,076 more than homes that did not.”

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Let us examine the top 10 states with the largest renter percentages:

Source:  Census

It should come as no surprise that New York has the lowest number of people who own their home.  New York is nearly split down the middle between those who own and those who rent.  New York is an incredibly expensive market.  So in this case, it does prove the notion that higher priced markets have lower home ownership rates.  This also applies to California and Hawaii.  But what about Nevada and Texas?

For Nevada and Texas, home prices are affordable but for two very different reasons.  The low home ownership rate of Nevada is largely due to the enormous amount of people that bought homes in the state as investment properties.  These were not labeled as owner occupied homes but more as rentals.  After the bubble burst, it will be interesting to see how this trend plays out over the next few years.  With Texas, home prices never really entered into a housing bubble category.  Then again, their home ownership rate is more in line with the nationwide rate of 66 percent.  For this market, it is likely that they will do better going forward simply because the amount of foreclosures is much lower than say a Nevada or California.  Foreclosures by default pull prices lower.

The enormous housing bubble has brought into question the overall purpose of real estate.  The lack of discussion surrounding renting and the merits that it brings are troubling.  In many cases, to rent a place offers many benefits including:

-Low to no maintenance costs

-Fixed duration (you have the ability to leave after the lease is up for other career opportunities)

-Lower overall housing costs

There are many positive things that come with renting but with so much housing propaganda, people have been conditioned to believe that renting is the equivalent of flushing money down the toilet.  This view is wrong.  In fact, with millions of “homeowners” underwater it is easy to argue that renters are in a better financial position than many so-called homeowners.  Many of these underwater homeowners now have a negative net worth simply because of their inflated mortgage.  The housing bubble bursting has changed the calculus on homeownership and has made renting much more attractive.

The irony of the current policy of trying to push people to buy more homes with tax credits and artificially keeping interest rates low is that it has pushed the vacancy rate up dramatically:

As more demand was pulled forward, a large amount of rental properties were left vacant on the market.  What this did was also added pressure to current rental rates thus making renting a more attractive option moving forward.  So as the government, combined with Wall Street’s blessing encouraged homeownership at a near religious pace, the rental market actually has gotten better for those looking to rent.  This has also added more pressure for large commercial real estate holdings that actually cater to the rental market.  So we shift problems from one market (residential real estate) to another (commercial real estate).  In the end, there has to be a balance and in places like California, rental rates have fallen:

Peak Rents

Los Angeles Rent (measured from CPI):                                281.284 (May 2009)

San Francisco Rent (measured from CPI):             299.643 (July 2009)

Current                Rents

Los Angeles:       279.260 (drop of 0.7%)

San Francisco:    296.926 (drop of 0.9%)

The fact that rents have actually fallen in these popular markets is significant.  This comes at a time when there is an enormous push to get people to purchase homes.  Yet if people can’t afford a home, then why push them into a financially disastrous situation?  Clearly the interests for the banking and housing industry are closely tied.  If we think about a program like HAMP, it was largely designed to help the banks to get their monthly payment for as long as possible.  There were no principal reductions (cram downs) and research shows that this would be the only alternative to really have a fighting chance of helping in foreclosure (and a small amount at that).

Renting is an excellent option for many and the current misguided policies are showing up in different areas of the housing market.

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The real issues are deeper and no one in Sacramento has come to the table with solutions.  First, let us look at the general revenues of California:

The largest source of revenues for the state comes from personal income taxes.  This wasn’t always the case.  Over half of all revenues come from personal income taxes (52%).  With the California unemployment rate at over 12 percent (real unemployment + underemployment is closer to 23 percent) the amount of payroll taxes has plummeted.  Sales taxes, which indirectly benefitted from the extraordinary California housing bubble, have now fallen drastically as well.  If we go back to even the 2008 fiscal year, we will find that sales taxes came in at $35 billion.  Today they stand at $25 billion (a drop of 28 percent).  This is to be expected given the high dependence of California on all things housing related.

If we want to examine the decline in the trend, let us look at housing sales at different points and time in the state:

Now this is an interesting chart showing how quickly things changed for California.  From 2000 to 2006 the pattern was very clear and held steady.  What you need to remember is that during this time, the vast majority of home sales (90+ percent) were organic home sales.  That is, these were not distress sales.  So each home sold, in many cases also generated another buy.  For example, say a family was selling their starter home and moved up to a bigger place.  This churn produced new taxes each time (i.e., new assessment on the property, taxes on sales commission, spending from new income etc).  Today close to 40 percent of all homes sold were foreclosure resales.  This number has trended lower but the amount of funds being generated are much lower.

We also need to remember that the median home price in the state fell from over $500,000 to $250,000.  So commissions just by the price cut were halved.  This is reflected in spending but also the unemployment rate in the state which is still very high.  If we look at select sectors we see clear signs of a minor depression:

Constructions jobs have fallen by over 30 percent from their peak.  The finance sector in the state has lost close to 200,000 jobs from the peak.  These were high paying jobs based on the housing bubble.  Since we know that option ARMs paid good commissions and half are here in the state, how much money in commissions was generated during this past decade?  These loans are not coming back and prices are not going to the peak level so structurally the state needs to find other income sources to plug the budget.  But the question is, where is this money going to come from?

The state is left with two roads to travel.  In one, they can increase taxes to raise revenues but raising taxes without surgical precision will cut deeper into the economy.  You can cut more into the budget but this also will cause pain in the real economy since the private sector in the state isn’t hiring at all.  In the end, these are the questions California state leaders will need to wrestle with in the summer.  Yet the fact that we are already late once again and the gimmicks are out, we know that it is going to be another long and drawn out summer.

People don’t usually pay attention to longer term trends.  Yet these happen slowly and progressively.  Look at how the California tax structure has changed over the last 40 years:

What does the above shift account to?  A large part of the shift occurred because California shifted to a large service oriented state.  Many of these services are not taxed through the sales revenue channel.  The housing bubble was the perfect culmination of this all.  A large portion of the state income shifted from those in the industry churning home sales at higher and higher prices.  Yet this was unsupportable and that is why the state finds itself in deeper problems than many other states.  No doubt, this recession is impacting the country but few states have the deep structural problems that California will be facing going forward.

The state has increased spending in many areas:

Interesting to see how much money now goes simply to service current debt.  Some areas grew way beyond the normal rate of inflation (i.e., corrections, infrastructure debt service , etc) and this has caused spending to jump off the charts.  Much of this was hidden with a once in a generation housing boom but now with that gone, where will the money come from?  That is the major question that will need to be answered in the second half of 2010.

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