The rise in Bay Area home values is part of the California housing bubble yet is more pronounced in the north.  I’m not sure if we should be proud about being the leading spot of reality-disconnected real estate in the world but that is what we have.  Even with the dramatic decline in Bay Area home prices, some choose to ignore the numbers that prices have corrected.

Take for example this data:

Bay Area median price 

November 2005:                              $625,000

February 2012:                                  $325,000

Bay Area housing has seen a 48% price decline for the entire region and has wiped out $300,000 on a per capita home basis yet some still choose to ignore that a correction has occurred.  Is seven years not enough to bring some people back to reality?  Yet when it comes to Bay Area real estate, this is what we are dealing with.

Many buyers in the Bay Area are currently investors:

DataQuick

Why does the above matter?  Because these investors are looking for cheap properties and they are a big part of the market.  26 percent of all purchases last month came from investors and the chart clearly shows the path of where things are heading.  The typical property they bought cost $230,000.  We are a long way from that $625,000 figure.  All those funky California loans are sure coming back to bite us hard in 2012.

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“(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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