Retirement


Gen Y to Lead ‘Massive Increase in Housing Demand’

Daily Real Estate News | Wednesday, July 20, 2011

 

Watch out for Generation Y: This large, diverse, well-educated generation will drive the housing market recovery over the next 10 years, according to economists with the University of Southern California Lusk Center for Real Estate.

Gen Y (15-32 year olds) boasts about 77.4 million members, which is about equal in size to the baby boomers (46-64 years old). Yet, Gen Y is much more diverse and educated (60 percent of Gen Y goes to college), according to the center, which recently presented its findings at the USC Lusk Center Orange County Executive Briefing.

Stan Ross, Lusk Center Chairman of the Board, says that “baby boomers and Gen Y comprise 50 percent of the population and will soon be part of the largest U.S. wealth transfer ever.”

As more of this age group joins the work force, “they will produce a massive increase in housing demand,” forecasts the USC’s Lusk Center.

However, Ross points out “these kids are concerned. They have watched the stock market, financial markets, and economy wipe out their parents’ retirement plans. As a result, they will choose lower-risk investment strategies.”

Source: “USC Lusk Center Says More Educated, Diverse Generation to Drive Real Estate Recovery,” The Hoyt Organization (July 19, 2011) [No Link]

8 Common Seller Problems (and How to Resolve Them)

If you’re working in real estate, you’re bound to run into one of these problems. But if you address them early and honestly, they shouldn’t present major obstacles for your transaction.
July 2011 | By Rich Levin

Do you ever clash with sellers on price, staging, or marketing? Has someone ever asked you to lower your commission? Has a seller’s personality ever rubbed you the wrong way?

If you work in real estate—and you aren’t exclusively a buyer’s agent—then the answer to those questions is almost certainly yes. But unless you’re working with someone who’s incredibly dense and obstinate, these problems don’t have to slow down the selling process.

The Problems

Note that the problems below don’t apply just to real estate professionals. In fact, they’re even bigger issues for sellers. These cost them time, money, and aggravation, and disrupt their lives far more than their agents’.

1. Sellers can be uncooperative on price.

2. Sellers frequently believe that the way they live in the house is the way they can sell the house.

3. Sellers are often unprepared for low appraisals.

4. Most sellers aren’t negotiation experts. They may bring expectations and anxiety that make everyone’s experience more difficult.

5. Sellers can be uncooperative on commission and might even request a reduction.

6. Sellers regularly have unrealistic demands concerning showings, advertising, marketing, and communication.

7. Agents and sellers may have personality conflicts.

8. Sellers might not be aware of all the closing costs.

Solving these problems gets sellers’ homes sold faster, for more money, and with less stress.

The Universal Solution in Two Parts

Before we get into the solution, it’s important to point out that owners don’t fully understand the entire process of selling a home. These problems would occur far less or not at all if agents could give them a crash course on selling, in which the practitioners covered these issues in a frank way. If that happened, I believe that sellers would be more cooperative.

The universal solution in two parts is first to ask the seller specific questions over the phone and at the beginning of the listing presentation as the agent is establishing rapport. These include:

▪ “Have you done much research to determine the asking price or how to sell a house?”

▪ (If yes) “We’ll talk more when we get together, but what are some of the more important things you discovered?”

▪ “Why are you thinking of selling?”

▪ “Where are you going?”

▪ “Is there an ideal time frame to have the move complete?”

▪ “The tax records indicate that you bought it x years ago, is that correct?”

▪ “Have you refinanced?”

Similar to how a doctor asks patients about their health history, this process gives the sellers confidence in the thoughtfulness, thoroughness, and ability of practitioners.

The second part of the universal solution is for real estate pros to build a listing presentation that addresses each of these problems before they arise. Details on how to do that are below:

1. If they’re uncooperative on price, prepare a very thorough comparative market analysis. Show sellers all the research that you used to select the properties you chose for the final CMA. Offer your pricing recommendation, but let sellers choose — and “own” — the list price.

2. Sellers believe the way they live in their house is the way they can sell it. Ask sellers if they are planning to do any work to prepare it for the sale. If they are, use your judgment to determine whether they will follow through or not. Share examples and anecdotes of how house cleaning, reorganizing, renovations, and so forth have helped homes sell faster and for more money.

3. Describe the entire pending process, from offer acceptance to closing. As you go through this, cover other stumbling blocks and how you work to prevent or address them.

4. Go over the entire negotiating process, from interested buyers to accepted offer. Also, explain pitfalls and emotional turbulence and describe how you will be their advocate.

5. If they’re uncooperative on commission, sometimes you will simply have to walk away. When possible, build so much value into your marketing plan that sellers are reluctant to even ask you to adjust your commission.

6. Show proof that what you do works. Continuously check for agreement. If and when they challenge you, make a note and return to it after they are impressed with your entire effort.

7. When it comes to personality conflicts, make sure you’re self-aware. Determine your personality style, and your strengths and weaknesses. Learn to recognize others’ personality types, and figure out which will naturally conflict with yours. Learn strategies for adapting.

8. Get sellers’ mortgage balances. Find out what else they plan to pay off with the proceeds. Then complete a detailed net sheet. Use a conservative sale price. Inflate the numbers a bit, so you can assure them it will likely be more in their pocket.

All of these bases can be covered either in conversations with owners over the phone before making an appointment or during the listing presentation. Top practitioners have spent years interacting, building, rehearsing, presenting, adjusting, and improving. Solving these problems consistently comes out of that effort.

Single Women a Rising Force in the Housing Market

Unmarried women continue to make up a growing segment of home buyers and are buying homes in record numbers: Last year, they composed 20 percent of all buyers last year, according to the National Association of REALTORS®. Single men accounted for 12 percent.

The Joint Center for Housing Studies says the three main reasons single women are purchasing homes are:

They have a strong desire to nest (the top-ranked reason).
They want to relocate closer to a job or family.
They need more space.

In capturing this growing segment of female buyers, builders are reflecting more female tastes in the design of homes. For example, in new houses, builders are adding security features, gourmet kitchens, and maintenance-free yards to appeal more to the single woman buyer.

Housing experts say that single women are purchasing homes at various stages in their lives some are new college grads and plan to one day get married while others may be divorced or just want to set up roots in their own place.

Source: “Singles Dive Into the Real Estate Market,” SecondAct/MSN (July 12, 2011)

Read more:

Meet 4 Women Buyer Personality Types

Raising Debt Ceiling Critical for Real Estate

In a letter issued to President Obama and members of Congress, a diverse group of national business leaders, including Realogy CEO Richard A. Smith, called on lawmakers to raise the $14.3 trillion U.S. debt ceiling and commit to a deficit reduction plan.

Experts have said that failing to increase the debt ceiling would not only have significant implications on the economy in general, but also real estate. If the government defaulted on its bonds, the government likely would have to raise interest rates dramatically, which would in turn hamper home ownership. (Read more at Speaking of Real Estate.)

“It is critical that the U.S. government not default in any way on its fiscal obligations,” the business leaders wrote in the letter to lawmakers. “Treasury securities influence the cost of financing not just for companies but more importantly for mortgages, auto loans, credit cards, and student debt. A default would risk both disarray in those markets and a host of unintended consequences.”

The letter was signed by several associations and companies, including Realogy, the Business Roundtable, the U.S. Chamber of Commerce, the Financial Services Forum, the National Association of Manufacturers, and others.

Also in the letter, the group called on lawmakers to reduce the nation’s long-term budget deficits. “As businesses make plans to invest and hire, we need confidence that, in the absence of a crisis, our government will not reverse course and return to large deficit spending. … Now is the time for our political leaders to put aside partisan differences and act in the nation’s best interests,” the letter stated. “We believe that our nation’s economic future is reliant upon their actions and urge them to reach an agreement. It is time to pull together rather than pull apart.”

Read more:

‘No’ on Debt Ceiling Would Clobber Real Estate

One long, grueling summer for California’s recovery

By Tara Tran • Jun 20th, 2011 • Category: Feature Articles, Journal Articles, June 2011 Journal

This article reviews indicators in the market which signal the long-awaited national housing recovery and evaluates the California real estate market’s progress towards recovery.

The worst is (almost) over

Meditating on the landscape of American housing doesn’t bring much peace of mind, yet economists claim a nugget of hope is wedged somewhere beneath the muck of this real estate bust, even for the more deeply entrenched California.

2011 has thus far failed to yield an economic recovery of leaps and bounds and thrust us beyond the Great Recession. Low interest rates (courtesy of the Fed and generous government housing subsidies) triggered an artificial leveling of home prices nationwide going into 2010, but were insufficient in duration and intensity (or reception) to bridge the recession gap.

Many economists predict an additional 25% decline is not out of reach for reasons now known to all involved.

Prices nationally in the first quarter of this year hit a new low – 5% lower than one year ago, according to the S&P Case-Shiller Index. Thus, the nation’s home prices have returned to mid-2002 levels. Many economists predict an additional 25% decline is not out of reach for reasons now known to all involved. [For more information on tracking the market with the most recent data from the S&P, see the first tuesday Market Chart, S&P 500: Stock Pricing vs. % Earnings (P/E Ratio.]

A look at other circumstances in the national real estate market lead some to believe this is the worst of the storm and a sustained recovery is now on its way, in spite of current price adjustments.

Hints of a national recovery

Positive signs – nationally – thus far include:

  • advantageous home purchasing conditions due to low decade-old prices and very low mortgage rates, both slipping downwards at the same time;
  • gross rent multipliers (GRMs) such as home prices and home price-to-rent ratios of between 9-11 times the annual rental value which mirror the stable long-term trend of pre-bubble years [For more information about the GRM, see the June 2010 first tuesday article, Renting vs. buying: the GRM.];
  • lower apartment vacancies and higher rents, which typically help bolster home prices;
  • an 18% decrease in new foreclosures from the previous quarter and improved household delinquency rates for a fifth consecutive quarter as more borrowers catch up with their mortgage payments versus those who fall behind; and
  • 200,000 new jobs added to the economy in each of the past three months and 1.2 million jobs in the past year (more jobs mean a lot of positive things, but it is a particularly good sign for the construction industry which, if given a leg up, may consequently boost home prices). [For more information on positive indicators in the nation’s housing market, see the Economist article, The darkest hour: Signs of hope among the gloom.]

A gauge for California’s recovery

That’s national, and this is California, the seventh largest economy in the world. But is recovery in California feasible, or just a far-fetched fantasy?

Here we evaluate the Golden State for the same (positive) signs and provide a forecast most Californians will likely have to live with:

  • Are home purchasing conditions advantageous? Yes, you can bet on that. Rarely do we get low prices, low interest rates and low down payment financing at the same moment in time. All that is needed is the will to buy, which in part requires brokers and agents to get the word out that mortgages are available at 4.5% if you apply.

Prices fell 2% in Los Angeles, 4% in San Diego and 5% San Francisco for the year ending with the first quarter of 2011, and further drops are forecasted for the rest of the year. Buyers have this information and what it is telling them is to wait until prices bottom to make offers. Agents have their work cut out to convince buyers that a further drop is likely but the present pricing will look most proper in three or four years, and will make no financial difference in ten years.

Interest rates have also been and are on a continuous decline. The average rate for a 30-year fixed-rate mortgage (FRM) in the U.S. Western region dropped to 4.45% the second week of June. The 15-year FRM also dropped in the same week to 3.63%. However, even with these deals and steals on the market, people are just not buying. The agent’s advice is that rates cannot move much lower, if at all, and they can and will rise in the future as the recovery gains steam – as will prices.

Home sales volume in California has dropped since the first quarter of 2010. 35,202 total homes sold in April 2011, trending consistently down from 37,908 in April 2010. [For more information on home sales volume in the current market, see the first tuesday Market Chart, Home sales volume and price peaks.]

  • Are prices stabilizing? Yes. The lingering drop in home prices across California in all tiers of housing is not a momentary dip from which they will fast rise akin to the fabled V-shaped recovery. Today’s home prices represent a resetting of the artificially high prices of the bubble years (which commenced in 1997) to their more stable levels consistent with historic trends. The end of 2011 may just likely see that reaction to low interest rates and a better informed and more confident public. However, that annual rise is more likely to reflect the consumer price index (CPI) rate of inflation rather than the 5 to 10% annual rate buyers are now thinking they will experience.

Except for those negative equity homeowners imprisoned and burdened by insolvency due to the steep price plunge, price stabilization is good news for California’s housing market in the long run. [For more information on historic home prices in California, see the first tuesday Market Chart, California tiered home pricing.]

  • Are rents higher? Yes. While home prices fall steadily, rents in California continue to rise, 4% for the year ending April 2011, according to the Spring 2011 Housing Report by HotPads.com. (Although landlords in the bedroom cities of the state’s inland and central valley will beg to disagree.)

Rent prices are indicators of which way home prices will go since they are the primary fundamental used to set property values. However, any rise in home prices beyond the rate of consumer inflation will take several years. [For more information on rentals in California, see the first tuesday Market Chart, Rentals: The Future of Real Estate in CA?]

  • Are household delinquency rates better? Sort of. Compared to the 18% nationwide drop in foreclosures, California foreclosure numbers are loitering near stagnancy. 8% more homes were foreclosed upon in California’s high-tier areas in the first quarter of 2011 from a year earlier. An even higher 23% more homes in low-tier areas were foreclosed upon in the same period.

Foreclosures in both housing tiers dropped only 2% over the year ending April 2011. Mortgage delinquency in the state is improving at an equally slow pace. 9% of mortgage payments were seriously delinquent in the first quarter of 2011, a slight but steady decline from 11% a year earlier. Thus we have an inventory problem called excess supply (the REOs), and until the buyers enter and start to cut into that supply, the prices will remain low, market momentum will be negative and competitive buyers for a property will be rare.

California foreclosures and delinquency rates, like other sand states, are higher than the rest of the nation but are improving at a faster rate. So when the market shifts to positive volume and pricing, some buyers will be surprised. [For more information on first quarter 2011 California defaults and foreclosures, see the April 2011 first tuesday article, 1Q 2011 defaults and foreclosure data.]

  • Do we have more jobs? Yes, but not enough and not fast enough. As of April 2011, California has yet to replace 1,298,700 of the jobs lost since the peak of California employment in December 2007. 363,100 jobs have been added since the beginning of the recovery in January 2010 and employment numbers have gradually made small ticks upward since then.

Employment needed to rent or buy a home was up by 148,100 jobs annually in April 2011. But what we need is around 400,000 jobs annually to get back to the pace experienced in the late 1990s. Jobs are slowly returning but will not reach pre-recession employment levels until 2016. [For more information on the effect of statewide employment on real estate, see the first tuesday Market Chart, Jobs Move Real Estate.]

Slow and steady to the end

Now back to the first question: Will California get to the finish line of its recovery? Yes. But if we’re to have a robust and sustained economy, keep in mind, the recovery will – and must – be gradual.

We just need two more ingredients to add to the mix: more jobs and more consumer confidence.

Although California is definitely a step behind the nation heading for recovery (just as it was a step ahead of the nation in growth during the Millennium Boom a few years ago), the conditions for a housing recovery are not completely absent in the state. We just need two more ingredients to add to the mix: more jobs and more consumer confidence.

Brokers and agents can do nothing about jobs. What they can do is give prospective buyers great detail about a property and extensive justification for its value, and then escort them through the loan pre-approval process with a couple of lenders. These simple gestures of due diligence will get the confidence of buyers up immediately. They merely need someone they feel they can depend on for advice.

Without an adequately employed population both poised (read: ready and free of their negative equity homes) and willing to buy, California will continue to march across the rocky plateau of its flat-line recovery. [For more information on building public confidence in a depressed real estate market, see the June 2011 first tuesday Market Chart, A bounty of loan deals, a dearth of willing buyers.]

– ftCopyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

Golden state population trends

By Bradley Markano • Jun 24th, 2011 • Category: Feature Articles, Journal Articles, June 2011 Journal

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This article reviews the shifts in California’s population during the past decade, and examines the potential impact of current migration trends on residential rentals and sales.


Chart last updated 6/24/11

  2011 2010 2009
CA Population
37,510,766
37,266,600
36,887,615

Chart last updated 6/24/11

  Los Angeles
San Diego Orange Riverside San Bernardino
2000
9,519,338
2,813,833
2,846,289
1,545,387
1,709,434
2010
9,818,605
3,095,313
3,010,232
2,189,641
2,035,210

Chart last updated 6/24/11

  Santa Clara
Alameda Sacramento Contra Costa Fresno
2000
1,682,585
1,443,741
1,223,499
948,816
799,407
2010
1,781,642
1,510,271
1,418,788
1,049,025
930,450

Population change: the last thirty years

The first of the above charts tracks the annual change in California’s total population since 1980, based on data about births, deaths and immigration as revealed on the decennial U.S. Census.

The following two charts track population change in California’s ten largest counties. Coincidentally, the five largest are all located in Southern California, and the following five are all in Northern California.

State population growth is essential for a stable housing market. Brokers and agents who know which demographics are likely to move to and from California’s diverse counties will be better positioned to accommodate the needs of those groups when they arrive. To that end, both state and federal governments provide extensive information about California’s changing population.

California’s rate of population growth varies wildly from year to year as seen on the first of the above charts, but it has always increased over time. A year without growth in California is almost unheard of: according to the California Department of Finance (DOF), only three counties statewide (Plumas, Sierra and Alpine) saw their populations diminish in the first decade of the new millennium.

Editor’s Note: Even with all population fluctuations taken into account, California’s population growth rate since 1990 has been slightly lower than that of the nation as a whole. [For a comparison between California’s population growth and national population growth, see the first tuesday Market Chart, Rate of Population Growth.]

The average population growth rate in California during the 1990s was 1.3%, ranging from 1.8% in 1990 to 0.7% in 1994 and 1995, the first years of job recovery after the 1990 recession. Growth in the 1990s and 2000s was far below the glory years of the 1980s, when California’s population grew by an average annual rate of 2.4%, and rose by as much as 3.4% in 1989.

The low growth rates of 1994 and 1995 appeared to be nothing more than a passing abnormality brought on by the 1990 recession. However, high housing prices carried over from the real estate boom of the 1980s and the economic crisis of the 1990s combined to make the mid-1990s growth figures the new norm.

Population growth in the modern age

For the first decade of the new millennium, the average rate of population growth was 1%. The greatest increase in population occurred in 2000, the year before a recession, with a one-year growth rate of 1.48%. A similar jump took place in 1989, just before the 1990s recession, when California’s population rose by a full 3.4%. The smallest increase took place in 2006, at the height of the Millennium Boom, when the population’s decelerating growth rate slipped to 0.5%: the lowest rate since WWII.

While numerous temporary factors influence the rise and fall of California’s population, including birth and death rates, migration, cultural trends and environmental factors, the most important influences by far are economic. When jobs are plentiful, and housing is available at reasonable prices without the need for significant new construction, people feel empowered to realize the dream of residency in the fabled cities on the Pacific West Coast.

A strong economy is an incentive for both interstate and international immigration. A weak economy (like that produced by the Great Recession) discourages the optimistic and causes people to stay where they are. Indeed, a state without jobs can even lose people, as they leave for more employment-friendly environments in other states.

Historical population trends are thus a valuable contextualizing tool for economic recessions (marked by gray bars on the chart above). The recession of the early 1990s, for example, corresponded with a dramatic decrease in the rate of population growth; the year-over year increase in state population has never since risen back to its height at the end of the 1980s, when the plentiful Baby Boomer population formed households across the state. [For more information on the continuing influence of the Boomer generation, see the first tuesday Market Chart, Boomers retire, and California trembles.]

However, the Great Recession of 2007 had no comparable decelerating effect on the rate of California’s population growth. In fact, California’s population has increased at a greater rate since the start of the recession than at any time since 2003. This is likely because the recession of 2007, unlike the 1990s and early 1980s recessions, was accompanied by a tremendous drop in housing prices. This drop returned prices to their historic trend of slow but dependable increases, correcting for the distorted pricing that drove the population away from California in 2000-2006.

Suddenly, California real estate was once again available at prices comparable to real estate in the rest of the nation. Those who had been waiting to move west had begun to take advantage of the opportunity, and more will doubtless come when jobs become more prevalent, as they are beginning to do in 2011. [For historical real estate pricing in California, see the first tuesday Market Chart, California Tiered Home Pricing.]

Immigration

Immigration, both legal and illegal, is a crucial driver of population growth on the West Coast. This includes migration to California from other states and other nations. The largest proportion of international immigrants to California, by far, come north from Mexico. According to the U.S. Census Bureau, 37% of California’s population in 2010 was Hispanic, and this proportion has increased annually for the last twenty years. For reference, the homeownership rate among Hispanics in California is 46% compared to the statewide average of 57% (and dropping).

The vast majority of immigrants (both interstate and international) go to Los Angeles County, with an average of just over 76,000 people migrating legally to Los Angeles every year since 1984. Orange County, Santa Clara and San Diego are also attractive destinations: each has an annual average of over 14,000 (legal) immigrants.

The number of legal immigrants tends to fluctuate at approximately the same rate as the total population. Although the state’s birth rate and statewide emigration are both crucial factors influencing state population, immigration has made up an average 58% of the yearly increase in state population for the last twenty five years.

Illegal immigrants, who are legally able to buy property, borrow mortgage funds and pay property taxes by use of an Individual Taxpayer Identification Number (ITIN), are of equal importance to the state’s housing market. The Pew Hispanic Research Center estimated that an additional 11.2 million illegal immigrants lived in the United States in March 2010, virtually unchanged from 2009. This is down from the peak illegal immigrant population of an estimated 12 million in 2007. The decline is the first significant drop in the number of illegal immigrants in the United States since the 1980s, and was precipitated by the Great Recession and the corresponding decrease in job availability.

Illegal immigrants make up an estimated 3.7% of the national population. California has the highest portion of the nation’s illegal immigrants, with an estimated 2,550,000 illegal immigrants in March 2010.

California’s high rate of immigration, including the unauthorized immigration which results from its proximity to Mexico, is a largely positive economic force that continues to improve the standard of living and employment situation for many California natives. In a recent report, the San Francisco Federal Reserve determined that competition for employment between legal workers and illegal immigrants is far less prevalent a problem than is generally believed. The (generally) less educated migrant laborers, who tend to have less knowledge of the English language, tend to take jobs in different sectors than their English-speaking neighbors. [For more on the beneficial effects of immigration on the state’s housing market, see the January 2011 first tuesday article, Immigration’s impact on the housing market.]

The result is increased wealth across the state. Reports of competition with the native-born population are often exaggerated to become myths.

Just as importantly, every new arrival on California soil needs some form of shelter to live in. Again, in spite of popular opinion to the contrary, immigrants often have a positive effect in the housing market—they have the power to buy and sell property, pay taxes and contribute to all forms of economic activity. As brokers and their agents develop their businesses to meet the new real estate paradigm, immigrants will remain a crucial part of the puzzle, despite often being neglected by trade union brokers. This will be especially true in the suburban areas, as the Boomers retire and sell their property, and are replaced by immigrant homebuyers.

Intrastate migration and age

In 2003, the California DOF released a detailed report tracking migration patterns (people entering and leaving the state) among homeowners statewide. Although population trends have changed since then, the DOF’s reportstill provides a useful snapshot of the moving habits of California residents in times of relative fiscal stability. [For the full DOF report, see The Current Population Survey: 2001-2003.]

64% of relocating Californians remained in the same county as their former residence in 2000-2003. 21% remained in California, but moved to a different county. Only 10% moved to a different state; the remaining 5% left the country entirely.

In this three-year period, 5,378,322 Californians moved from one residence to another (one sixth of the total state population). The vast majority of these movers were under the age of 50. 41% of them were between the ages of 18 and 34. Keep in mind that a large portion of this age group continues to rent rather than buying a home, muting, but not negating, their influence on the single family residence (SFR) housing market.

In 2010, the homeownership rate among those aged 30-34 in the Western Census Region (which includes California) was 44%, and for ages 25-29 was 31%. Renters are far more likely to relocate than homeowners: the annual rates of relocation were 26% for renters, and 9% for owners. Negative equities will continue to drive the owner relocation percentage even lower well into this decade, to the dismay of multiple listing service (MLS) agents and builders. [For more on homeownership rates by age, see the first tuesday Market Chart, Homeownership Rate: Western Census Region.]

Although first tuesday anticipates more and more senior citizens will change their residences in the upcoming years as the Baby Boomer generation retires, DOF data indicates the greatest number of new homes tends to be purchased by the young. In the researched time period, the moving rate among those aged 65 and over was only 5% annually. [For more information on the Boomer generation, see the first tuesday Market Chart, Boomers Retire, and California Trembles.]

Demographics of interstate migration

Aside from age, other demographic factors played a smaller role in determining mover status. Intuitively, men were very slightly more likely to relocate than women, singles were more likely to move than couples and those with more education (a bachelor’s degree or higher) were more likely to relocate than those with less. These profiles will drive Generation Y (Gen Y) coming of homeownership age this decade into rentals, often in urban cultural centers. [For more on the current and anticipated habits of Gen Y, see the May 2011 first tuesday article, Gen Y continues to shy away from homeownership.]

As usual, employment is an essential factor. The unemployed were considerably more likely to move than the employed (the rate of relocation among the unemployed was 24%, as compared to a rate of 17% among the employed). Those with incomes of $50,000 a year or over (often members of the older population) were significantly less likely to move than those with lower incomes. [For information on California income and employment, see the first tuesday Market Chart, Jobs Move Real Estate.]

From March 2000-March 2003, the DOF also tracked movers’ reasons for relocating. By far the largest proportion of those who moved in this time period (53%) relocated for housing-related reasons. The next two most popular motives for moving were family-related reasons (25%) and employment-related reasons (17%).

Interestingly, this did not hold true for those who came to California from another state or another country. Out-of-state immigrants overwhelmingly tended to come to California for reasons related to employment. [For more on California’s business-friendly environment, see the October 2009 first tuesday article, Let my people go! The myth of the vanishing California population.]

Location is everything, when moving

In collaboration with the U.S. Census Bureau, the DOF monitors and forecasts both interstate immigration and intrastate migrations. They present a clear view of which parts of the state are growing or shrinking fastest. While some county populations have remained stable over the last ten years, others have seen their populations explode. By far the most notable increase occurred in Riverside County, which gained 644,254 people during the 2000s; an increase of 41.7%. San Bernardino County was a distant second, growing 19%. Other notable increases took place in Los Angeles, Sacramento, San Diego and Orange Counties. [For a visual display of DOF Population change by numeric increase, see the DOF’s [Map of Population Change (Numerical)]; for a map of counties tracking percent increase, see the DOF’s Map of Population Change (Percent).]

The enormous popularity of Riverside County during the decade is easily explained: as the DOF data indicates, it’s all about housing. For much of the last decade, housing prices in Riverside county grew at a steady rate (one which forecasters erroneously predicted would last forever) while still remaining far more affordable than the coastal cities of nearby Los Angeles, Anaheim/Santa Ana and San Diego.

What’s more, Riverside is close to the jobs and cultural opportunities of those cities, and shares in the fair weather and romantic mystique of southern California. Nearby San Bernardino also benefited from the same combination of advantageous factors. [For a snapshot of some California housing prices in three major cities, see the first tuesday Market Chart, California Tiered Home Pricing.]

It should be noted, however, that Riverside’s population boom was not without its disadvantages. While the county saw new prosperity and expansion in the years leading up to 2007, it was also ravaged by some of the worst job losses (still being experienced in mid-2011), unemployment and negative equity problems of the Great Recession.

Areas which saw less dramatic growth, like San Francisco and parts of Los Angeles, suffered far less and began to recover more quickly than Riverside (although no part of California was wholly spared the ripple effects of the recession’s wrath). In upcoming years, first-time homebuyers may be more hesitant to move to locations like Riverside, which once appeared to be suburban success stories.

The new appeal of urban living

Instead of a continuation of the suburban lifestyle, first tuesday anticipates an increase in centralized urban populations, which will be especially reflected by a boom in rental property and condo sales in urban centers. Urban locations offer access to a world of social and cultural activities which are unavailable in strip-malled suburbia.

More importantly, the Great Recession has exposed the folly of the U.S. Government’s former policy of “universal homeownership.” New buyers will be far more likely to think twice before they invest their life’s savings subordinated to the risk of a long-term mortgage. [For more on the new appeal of rental property, see the February 2011 first tuesday article, Rentals: The future of Real Estate in CA?]

The shift to rentals, and to cities, will only be accelerated by the impending retirement of California’s most powerful demographic: the aging Boomers. Upon retirement, numerous Boomers can be expected to sell their homes and move to new locations, often closer to the coast or closer to their grandchildren. The Boomers are overwhelmingly, a generation of homeowners, and most will continue to be in the future, regardless of where they relocate. The majority will remain in their current communities.

Others, however, will elect to rent in more convenient locations or to move in with family members in the increasingly available casitas or granny flats (which were recently made legal statewide). The first-time homebuyers who will take their place (Gen Y), will be less numerous and less eager to buy homes (much less in suburbia) than their parents. [For more on the Boomers and Gen Y, see the October 2010 first tuesday article, The demographics forging California’s real estate market.]

As the West’s largest city, Los Angeles will undoubtedly remain the population center for the foreseeable future. Los Angeles is forecast to have a population of 11,214,237 by 2020, and will exceed 13 million by 2050. For comparison, the DOF predicts California’s second and third largest counties in 2050 to be Riverside and San Diego, both with anticipated populations of just over 4 million. Orange County is predicted to fall behind, and has already shown signs of being hindered by its governmental and private restrictions on land use and development opportunities. [For more on the pivotal role of urban centers, see the May 2010 first tuesday article, The plight of California to be solved by… cities?]

Although nothing is certain when predicting the future, one thing does seem highly probable: California will continue to grow, and to flourish. DOF forecasts expect the entire population of California to increase by approximately five million people every decade through 2050, and some cities are likely to double in size if they alter land use and height restrictions and allow for population density to increase per square mile.

While an increased population will pose new challenges in water management, energy and housing sectors, it will also be a source of new talent and new opportunities. No other state in the nation has the wealth, resources, entrepreneurial spirit and innovative history that enables California to maintain its distinctive appeal to the rest of the nation. As time passes, and more come to share in that success, the Golden State’s appeal can only be expected to grow.

– ftCopyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

The fate of suburbia

By Connor P. Wallmark • Jul 8th, 2011 • Category: Feature Articles, Journal Articles, July 2011 Journal

Part II of this article series comments on the deterioration of suburbia in its current form and discusses the factors shaping suburbia’s future.

For a discussion of the coming depopulation of suburbia as the highly educated Generation Y and retiring Baby Boomers return to California’s urban cores, see Part I of this article series.

Poverty and crime

The Millennium Boom hit suburbia especially hard, as residents in suburban areas are disproportionally vulnerable to shifts in the broader economy as they lack adequate employment centers. Consider California’s largest centralized influx of population during the past decade, Southern California’s Inland Empire where a majority of jobs were related to the construction industry. As a result of the Great Recession, the Inland Empire currently has an unemployment rate of 14.8% and is currently still experiencing a net loss of jobs.

Without employment after the Boom, defaults soared and ghost towns were left. As of April 2011, the concentration of defaults were consistently higher in lower-cost suburban areas, with a ratio of 11 notices of default (NODs) filed for every 8 NODs for the rest of California. The increased vacancies in suburban neighborhoods has resulted in blight and increased crime. Much like the inner cities of the ‘60s and ’70s – known for high crime, gangs and poverty – suburbia will become the newest retreat (or jail) for California’s economically more desperate.

Suburbs now have the largest poor population in the nation.

Suburbs now have the largest poor population in the nation, as reported by the Brookings Institute. Between the years of 1999 and 2008, the legion of suburban poor grew as much as 25%, five times the rate of the poor in urban areas. This trend mirrors the fall of Moreno Valley and the Lancaster area after the collapse of the economy in the 1990s when jobs failed to support the Boomers who had recently moved in. Just as short sales and distressed property sales became the norm in 1992-1997, the same trend continues today in newer subdivisions.

Crime in blighted suburban areas will similarly swell in future years as a massive swath of latch key children, raised by babysitters and the television, will come of age. The absence of parents while growing up, who were by necessity away from home in the centers of employment earning a living, will make itself known on a broader societal level as these children grow out of childhood. This in turn will further drive out the educated elite who will escape to the gentrified city. In their place, their sprawling suburban houses will be rented out to less savory, lower-income tenants or sold to owners (if the price is right), who will likely perpetuate the cycle.

Obsolescence and diminished social services

Schools and public services in suburbia will worsen. While the suburbs may have been cheaper in the short-term for suburban purchasers, numerous long-term hidden costs will present themselves. The suburban tax base – fed from new development and the rising property values which existed during the boom – will erode based on resale prices. The price cities pay for services do not erode.

Costs inherited by the suburban taxpayers will include:

  • the cost of building and maintaining new freeways and mass transit options for those stranded in the suburban desert who must commute to earn a living;
  • the long-term expense of cleaning up the environmental side-effects of suburbia’s encroachment into natural habitats and the steps taken to mitigate devastating wildfires in areas that were considered remote just years ago; and
  • the cost of providing new amenities and social services to suburbia’s growing population of geriatric and lower-income individuals.

Similarly, physical deterioration will be increasingly problematic. The Golden Arches of the McMansions will lose their luster as the rapidly mass-produced properties constructed by national builders in distant locations will begin to show their age and poor construction materials.

Fuel prices and electric cars

Long commutes from suburbia to employment centers contribute to pollution and global warming, add precious hours to an already long workday, and perpetuate American reliance on imported oil. Simply, it is an unsustainable cultural habit compelled by urban sprawl and suburbia’s dependence on automobiles to function without a more centralized employment hub. [For more commentary on urban sprawl, see Part I of this article series.]

The average commute of an employed Inland Empire dweller has gotten longer in the aftermath of the Great Recession, according to 2009 Census data, as a third of the residents commute outside of the region for employment, such as to Los Angeles, and only 5% use public transportation.

People tend to put up with longer commutes during periods of economic turmoil, as they are unable to sell their homes and relocate, and are willing to drive further afield for any type of employment and the income needed to keep the family going. However, once jobs return, these death-march commutes will no longer be tolerated.

Once jobs return, these death-march commutes will no longer be tolerated.

Fuel prices are higher than a commuter can justify – a reality that will only worsen with time. This condition will also encourage Californian suburbanites to relocate and live closer to their places of employment situated closer to the coast and large cities.

Is suburbia gone for good?

Does this mean that the McMansion stuffed culs-de-sacs will be bulldozed to the ground to make way for multi-family units? Can the private ownership interests tied up in a suburban neighborhood be unwound and the buildings unbuilt?

Despite the coming sea-change toward urban living, suburbia will not go the way of the dodo. Similar to a vestigial organ, it will lose its original function but not disappear entirely. Suburbia will be an appealing choice for those who value space and cost over the social and cultural allures of the city. Suburban areas in close proximity to employment opportunities in nearby cities, especially if they are connected via mass transit, will likely continue to garner the interest of future homebuyers.

The suburbs will also likely continue to house a large portion of California’s growing immigrant population. Hispanics currently make up more than 40% of the California population. From 2000-2007, the number of immigrants in Riverside and San Bernardino counties, mostly Hispanics hailing from Mexico, Central America and South America, leaped by more than half. However, this is changing too as Mexico’s greatly improving economy of 2011 is keeping more Mexicans at home, employed for the first time in their native country.

The suburbs will also likely continue to house a large portion of California’s growing immigrant population.

California will always need low-pay workers, native-born and otherwise, and these low pay workers will always need a place to live. The unskilled immigrant population with lower pay levels and their unskilled native-born counterparts will become the backbone of suburbia in the next couple of decades.

Due to their level of education and training, they cannot demand the high pay associated with professional urban jobs, but low-pay employment will still be available to them. These lower-income earners will need shelter in the new real estate paradigm, and suburbia will continue to offer a majority of California’s low- to mid-tier housing for them to occupy, with the exception of the very few low-income housing units provided in new developments for the inner cities.

Additionally, many of these lesser-educated individuals will not feel the same need to be in close proximity to areas of cultural significance – sites such as theaters, museums and the like – as they have not been inculcated from a very early age through education to appreciate such amenities. [For more information about immigrants and California real estate, see the January 2011 first tuesday article, Immigration’s impact on the housing market.]

To mirror the movements of the labor force, basic industry will also locate to low pay areas to cut their costs as they have done in the upper deserts of Los Angeles and San Bernardino Counties. Thus, suburbia and the outlying areas will experience an influx of light industry with labor intensive activities to fill up on cheap labor. The best paying jobs in these central California districts will be government employment, health care services and education.

Additionally, not all of Gen Y will flee to the “hip” allure of the cities. Though a majority of Gen Y may presently profess a desire to move to the cities when they are young and untethered by the three Ms (marriage, mortgage, maternity), it is unknown whether they will continue to hold this same aspiration ten to fifteen years hence when they are in a financial position to purchase.

Will the hip-illusion still entrance the members of Gen Y when they have the middle-age paunch, halitosis and a receding hairline?

Much like a thoughtless money-illusion, will the hip-illusion still entrance the members of Gen Y when they have the middle-age paunch, halitosis and a receding hairline? Or, like their parents, will Gen Y retreat back to the bastions of suburbia (now with family in tow) when homeownership becomes a financial possibility?

Though suburban landscapes will always be part of the California geography, their days of dominance are behind us. Thus, agents and brokers need to anticipate this massive demographic shift into urban areas, specifically multiple-housing projects with security and relatively high prestige. Take steps to prepare yourself now: starting 2016-2018, Gen Y and the Boomers will start to leave the long commutes, chaparral, sage and property maintenance of suburbia behind as they go to live where they work.

From city to suburbia then back

By Connor P. Wallmark • Jul 8th, 2011 • Category: Journal Articles, July 2011 Journal, Lead Article

Part I of this article series comments on the coming depopulation of suburbia as the highly educated Generation Y and retiring Baby Boomers return to California’s urban cores.

Conditions signal a mass return to cities

Since World War II, suburbia has enjoyed its status as an embodiment of the American Dream. However, the dream is fading as California wakens hung-over from 30 years of financial debauchery which culminated in the Millennium Boom and comes to terms with the realities of unchecked pre-Boom suburban growth.

Over the past 60 years, societal trends and economic pressures drove people from the cities to the undeveloped rural regions known as suburbs, also called bedroom communities. Allured by the suburban dream of large lot sizes and attached garages, suburbia featured real estate that was more plentiful and less expensive than the city, due to cheaper land values and mass production methods.

This phenomenon, known as urban sprawl, drove large portions of the city population to the suburbs. Extensive road systems and related infrastructure were built to accommodate the landowners, subdividers and eventual homeowners who lived amongst the chaparral and sage but worked in the urban centers – a ubiquitous condition which California is as famous for as its temperate climate. Cities collaborated by imposing height and density restrictions anchored in expansionist thoughts of territory grabs and a beefed-up tax base.

The growth pattern established after World War II relied heavily on:

  • the rapid horizontal expansion of metropolitan areas;
  • the conversion of farm and wild land into residential neighborhoods; and
  • the near exclusive use of the automobile and freeway systems to transport individual Californians from their bedroom communities to remote places of employment and culture.
In the wake of the mass exodus to suburbia after World War II, California’s inner cities began to suffer a slow deterioration.

In the wake of the mass exodus to suburbia after World War II, California’s inner cities began to suffer a slow deterioration much like blood hemorrhaging irretrievably from a pumping heart. Their populations shrank (if not in size, in quality) breaking down socially and economically as Californians were pulled from their large cities and transplanted to the Inland Valleys and desert areas.

As a result, crime rates soared in the abandoned urban centers, cultural amenities were shut down and, perhaps the largest wound of all, businesses and available jobs began fleeing on the coattails of the suburb-driven evacuees.

These non-sustainable growth patterns helped California emerge as an economic leader of the West Coast. However, in a cruel twist of irony, the deliberate but unguided sprawl which catapulted California to dominance in the post-war era is now an obstacle limiting its growth. The same land use patterns of urban sprawl which nurtured the growth of California from a time when it had only ten million inhabitants has morphed into a hindering albatross around the neck of the current California with over 37 million residents, elongating California’s ascent out of the economic doldrums following the Great Recession of 2008.

California’s love affair with suburbia reached its apex (and arguably grand finale) during the sweltering financial frenzy of the Millennium Boom. The resulting real estate paradigm shift put a sudden end to the real estate trends and practices forged in the prior 60 years (and topped off with 30 years of creative Wall Street financing), of which suburbia played a significant part.

In the coming years under the real estate paradigm we now face, California will be seeing another such migratory shift, but one in the opposite direction – from the varnished relic of suburbia, to the cultural magnet of the city. [For more information on the real estate paradigm shift, see the May 2010 first tuesday article, Looking through the window towards recovery: a real estate paradigm shift – Part I and Part II.]

Rise of the Gen Y

In the post-Boom paradigm, future demand for housing will focus on urban multi-family units, such as condominiums, multi-story townhouses and apartments, near the coast. Adversely, demand will shrink for inland single family residences (SFRs), according to the University of California Los Angeles (UCLA’s) Anderson School of Business Forecast and numerous real estate prognosticators – first tuesday included.

But what accounts for this change in population movement and which demographic will pave the way?

California’s population is trending younger and more educated, thus there will be less demand for suburban McMansions and greater demand for trendy, urban living space. California is one of the youngest states in the nation and thus its future will be disproportionally shaped by the post-Boomer generations. According to 2010 Census data, the median age of California is 35.2 (Maine, by comparison, is 42.7 and New York is 38). [For additional commentary on population trends in California, see the first tuesday Market Chart, Golden state population trends.]

With this higher level of education, the highly-skilled Gen Y will gravitate towards urban areas.

This massive younger population of those who were born in the ‘80s and ‘90s is known as Generation Y, also called Gen Y. A bulk of this demographic has returned to school to obtain a higher education and greater specialization as they were pushed from the job market during the Great Recession. Just over 70% of 2009 high school graduates enrolled in college, the highest percentage of college matriculation since this data began being tracked in 1959, according to the Bureau of Labor Statics.

With this higher level of education, the highly-skilled Gen Y will gravitate towards urban areas where they can implement their skills and receive higher compensation than allowed in the outlying areas. Not satisfied with money alone, Gen Y will likely also seek something slightly more obscure than simple economic prosperity. They will move to areas boasting cultural significance, places referred to by Gen Y as “hip,” denoting a certain ephemeral quality that belies youth, natural optimism and innovation. Not much happens for Gen Y on the metaphorical farm.

These magnets of prosperity will become places lush with cultural establishments which act as a physical testament to the ideals of the new generation. Areas featuring history and art museums, galleries, laudable universities, professional and financial centers, sporting events and upscale eating and drinking establishments.

These educated individuals are the Creative Class, as labeled by Richard Florida, author of The Rise of the Creative Class, a 2002 book on the urban renaissance. A majority of the Creative Class consist of accountants, lawyers and managers, whereas the Super-Creative Core is further classified as a cluster of high-skilled occupations, including academics, architects, artists and scientists. This Creative Class, to be driven by members of Gen Y, will congregate in cities with other innovative individuals to create industries we never had before.

Additionally, learning from their parent’s missteps in suburbia, many Gen Y buyers will be likely to think twice before they subordinate their life-savings to the risk of a long-term mortgage. Gen Y expresses a very different personal ideology than previous generations, including their parents (the Baby Boomers).

Gen Y’s visions of owning an All-American dream home in the suburbs have been stifled by perpetually low employment rates. Thus, they will rent for a longer period of time than their Boomer parents did. [For more information on the new appeal of rental property, see the February 2011 first tuesday article, Rentals: The future of Real Estate in CA?]

Seeds of this magnet paradigm have already begun to take root: permits for multi-family homes are currently at 40% of their peak level during the past decade, whereas permits for SFRs are only at 20% of their peak level.

The allure of the efficient city

High-rise buildings in California’s urban centers allow for large amounts of people to live in the smallest amount of space and at the highest degree of safety as they are secure with 24/7 security and surveillance. More importantly, travel time is reduced from an individual’s residence to his job, services, shopping, schools and places of socializing. To help conceptualize these benefits, think of energy efficiency (home ratings), carbon emissions (gas engines) and the time freed (not parked on the freeway) to do other things. [For more information on the merits of urban living, see the May 2010 first tuesday article, The plight of California to be solve by…cities?]

High-rise buildings house a large quantity of people in a relatively small geographic area, and they also invite a surge of service and research companies as employers take advantage of a centralized workforce. Scale also enables more competition, compiling like-minded individuals into a relatively small geographic area in which they can build off one another’s ideas and innovation can propagate. Humans have proved very good at collaborating, especially when competing with one another.

Consider Silicon Valley, the Fashion District in Los Angeles, Hollywood, Sacramento’s government headquarters, San Diego’s military industrial complex and the financial market businesses of San Francisco and South-Central Orange County. When the zoning of a location allows for high-rise density, small businesses will cluster, and create oases of economic prosperity. In turn, California’s small businesses are unrestricted in their ability to grow and grow, then become really big.

Marriage wanes with suburbia

The prevalence of the traditional nuclear family, consisting of a married couple with children, is on the decline, and with it, the relevance of the more secular suburban lifestyle. The 2010 Census reveals that the number of married couples makes up 45% of all households nationally, the first time the number of unmarried households outweighs those that are married.

The level of education also plays into this mix. In 1960, 76% of college graduates were married while 72% of high school graduates were married, a difference of only 4% between the two groups, as reported by the Pew Research Center. However, by 2010 this gap widened significantly – to 16% from 4% in 1960 as fewer educated individuals are getting married.

And while marriage is being postponed or ignored, many of the educated members of Gen Y are similarly postponing having children. In the late ‘40s-‘50s, families with young children made up half of all households nationally. By 2000, households with families were only a third of all households.

Boomers flee the suburbs too

But is Gen Y the only demographic to make this migratory shift back to California’s urban centers?

For many Californian Baby Boomers, retirement will be postponed due to the combined loss of asset wealth and retirement savings wrought by the stock market crash and the Great Recession. Baby Boomers, defined by the Census as the generation born between 1946 and 1964, will be required to stay in the labor force longer in order to acquire enough funds to finance their retirement.

As a direct consequence of keeping their jobs longer, Boomers will also be keeping their homes in suburbia longer to stay near their places of employment. Negative equity conditions for large numbers of Boomers will further tie them to their suburban properties until their loan-to-value (LTV) ratios drop below 94%. They may well strategically default in the coming years to rid themselves of the home and debt as credit scoring will mean less to them.

Once enough retirement savings have been amassed and the Boomers are able to slough off their suburban dwellings, many will move to the city.

However, once enough retirement savings have been amassed and the Boomers are able to slough off their suburban dwellings, many will move to the city (likely to be nearer to their Gen Y children and grandchildren). The advantages of urban living are many. Most condos come with amenities, such as community pools, workout facilities and much common space. Condo projects in higher density urban locations typically provide a high level of personal security. This allows for condo owners to spend time traveling without concern for the contents of their unit.

Rented multi-family units – condos and apartments – also offer a high degree of flexibility in a time when life can take a sudden, unexpected turn due to medical complications associated with aging. A lease can typically be cancelled within just a few months by working with the landlord. The same cannot be said for selling a property to quickly relocate.

Urban condos also require very little maintenance and no yard work by the owner, as is required by a detached SFR. Little wonder then that the Census reports three out of four citizens aged over 62 lived in metropolitan areas in the year 2000 – a trend that has likely increased in the past ten years. [For more information about Baby Boomers, see the March 2011 first tuesday article, Boomers retire, and California trembles.]

The Great Confluence

Sometime in or around 2020, a real estate bottle-neck will occur, known as the Great Confluence. As part of the Great Confluence, two demographic groups will simultaneously desire living space in the urban cores of California. By 2020, Gen Y will have completed college and entered the high-skilled labor force, eventually becoming financially capable of purchasing or renting a property. In the opposing corner, the Boomers will have worked those extra years necessary to be able to finally retire, some five to ten years later than they planned for in the ‘80s and ‘90s. [For more information on the development of Gen Y and their delayed entry into the real estate market, see the October 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities – Part I.]

These demand events for housing will occur at approximately the same time, prompting both demographic groups to migrate in large numbers to the cities simultaneously.

Editor’s note – For a discussion of the deterioration of suburbia in its current form and the factors shaping suburbia’s future, see Part II of this article series, The fate of suburbia.

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