InspireMyCapital.com | Nobody Walks in L.A. (or Apparently Can Own a Home) – Home Affordability Drops Again
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Nobody Walks

21 Oct Nobody Walks in L.A. (or Apparently Can Own a Home) – Home Affordability Drops Again

Housing Affordability is a common term used by real estate statisticians and the media to discuss the percentage of homes in any given area that are affordable to families earning the median income in that area.  This measure is officially tracked by the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) and is a very useful tool to glean some insight of not only where home prices are headed, but when the next down cycle will occur (see www.nahb.org). This is particularly true at the metro/city level as real estate is LOCAL.

But before we dive into the numbers, it is important to understand that HOI is derived from two primary components – median income and housing costs (principal, interest, taxes & insurance).  And HOI uses the conventional assumption of the lending industry that a family can afford to spend no more than 28% of it’s gross income on housing.  Think this is low?  Have you tried to get a mortgage lately?

In my home town of Los Angeles, the HOI is the 3rd lowest in the nation – meaning very few people who live in L.A. can actually afford to own a home – and has been ranked in the top 3 lowest markets for over 10 years now.  That’s in the entire United States, not just California, and the only cities with a lower HOI than L.A. are Orange County and San Francisco.  Go figure.  This helps explain why over 2.3 million adults in L.A. still live at home with their parents.

What is important to understand, however, is the downward trend we’re now seeing in the L.A. HOI over 9 straight quarters.  According to the HOI for Q2 2014, only 18% of Angelenos can afford to own a home in this city.  This is down year-to-year from 28% in 2013 and 48% in 2012.  While short-sighted optimists (read L.A. realtors) would say that these numbers are fantastic and just prove that home prices continue to rise, the real story is in the bigger picture.

Home sales are down and home prices have been stagnant (at best) in Los Angeles for over three quarters now.  The hot Spring/Summer buying season that realtors get excited about every year just didn’t materialize.  The mental state of buyers moved from frantic in the first half of 2013 to downright finicky this year.  And with the HOI in L.A. now dropping below 20% coupled with slightly rising inventory, it doesn’t look like home prices are going to go up again anytime soon.

What does this mean from an investment standpoint?

While many investors are sitting on large piles of capital and looking to deploy it in real estate, L.A. is clearly not the buy right now.  In the past, Los Angeles has always been one of the best long-time appreciation investments and one of the worst cash flow markets.  Now the former has been taken away and the latter is worse then it’s ever been, despite increasing rents.

So what should you do?  Fortunately, there are many high yield/low risk methods to securely deploy one’s capital in real estate both outside of L.A. and/or without having to actually buy the real estate.  And best of all, it can be done passively.

If you’d like to discuss how best to use this information in your investments, please feel free to contact us at 626.788.9700 or click here.