Columnists John Grace Opinion

ON THE MONEY: Millennials, keep your home-buying powder dry

The U.S. housing market is in a spot much like a roller coaster that is nearing the top of the peak.

As the ride crawls to the top, the coaster almost appears to come to a stop. Then the real fun begins.

Hold on folks and keep your arms and legs inside the vehicle. Home prices haven’t fizzled yet, but that doesn’t mean that real estate is the first bubble that fails to burst. All bubbles burst 100% of the time. Let’s be clear. There are no exceptions.

For a bubble to burst, prices must fall. And the bursts must start somewhere. Continued sales weakness is baked into the cake.

Orange County enjoyed a decade plus of gains from December 1996 to January 2007. That 122-month period spiked the Orange County median selling price by 213 percent, according to the Orange County Register. 

Orange County’s median home price fell on a year over year basis in February for the first time since 2012. The mid-point in Orange County’s price for all residences sold in February was $700,000, down 1.4 percent compared with a year earlier. Sales rose in only 20 of 83 Orange County zip codes, according to CoreLogic.

While this drop is so small as to be meaningless in practical terms, and possibly anomalous in statistical ones, it snaps a seven-year trend of constant price growth in this metric. While prices went up in San Francisco by 5.3% year-over-year to $1.38 million on average, Marin County and Santa Clara County median prices dropped during the same period by 4.7% to $1.08 million and 10% to $1.08 million, respectively.

Home prices increased four times faster than Los Angeles and Orange County wages from summer 2011 through summer 2018. While incomes rose 17 percent in LA County, home prices increased 73%, according to the Orange County Register. By comparison, and from the same source, U.S. wages increased 15%, while house prices rose 45%. Something has to give.

Nationally home prices still rose 6.9% in April year-over-year. But that’s the lowest price growth in five years. The latest data shows one in five metropolitan areas is now seeing decreases in home prices, compared with half as many a year ago, reports

Whether you call it a housing slowdown or a softening, it’s real and it’s here. Here’s the list of the 10 cities getting hit the hardest from as of May 20:

1. San Jose — Median list price: $1.1 million, Median list price change: -8.4%

2. Oxnard — Median list price: $681,100. Median list price change: -5.4%

3. College Station, Texas — Median list price: $265,000, Median list price change: -5.4%

4. Bridgeport, Conn. (Fairfield County) — Median list price, $750,000, Median list price change: -4.9%

5. San Francisco — Median list price: $948,300, Median list price change: -4.1%

6. Hilo, Hawaii — Median list price: $481,600, Median list price change: -3.5%

7. Cape Coral, Florida — Median list price: $30,000, Median list price change: -3.3%

8. Laredo, Texas — Median list price: $180,100, Median list price change: -2.9%

9. Huntington, West Virginia — Median list price: $143,300, Median list price change: -2.3%

10. Iowa City, Iowa — Median list price: $275,000, Median list price change: -1.8%.

There is only one country in world history that has increased by 76 million people. You know the group as the Baby Boomers, born between 1946 and 1964.

Please notice some were legitimate while others were illegitimate. Some were legal and others were illegal. The point isn’t about how the group showed up, the point is that a huge number of people came into the U.S. To accommodate all of that demand for housing it is logical that prices could get to levels that no one imagined.

With 10,000 people a day turning 65, it is now noteworthy that the average age of selling homes in America is 79, according to Dent Research & the U.S. Census Bureau. Boomers in 2019 range between 55 and 73.

It took 20 years for boomers to buy their McMansions, from 1980-2000 (source: Dent Research) so it is reasonable that it will take another 20 years for them to sell what they love, but cannot take with them to heaven.

At some point supply and demand matter. If 25 percent of the population goes to heaven and 130 years of inventory are left on what we all hope to remain this beautiful green thing we call Earth, when demand goes south and inventory remains the same, it is clear to this observer prices only have one way to go.

Huntington, West Virginia, for example, is a struggling metro badly affected by the opioid crisis. Many people are leaving the city on the Ohio River for better opportunities. 

That means there aren’t exactly a lot of people clamoring to buy real estate, which keeps prices down. Now imagine what prices will do in the country when 76 million people that came out of nowhere disappear. Forever.

Sing along with Paul Simon’s classic, “One man’s ceiling is another man’s floor.”

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.