Real Estate is entering a very unique phase relative to historical trends.  Based on our research, we have determined that Southern California is on the precipice of a significant round of household creation and price growth.  Since the start of the recession in 2008, demand has been held back by a number of factors:

• Those who would otherwise buy a home are “Credit Incapable” due to stricter lending requirements and other personal credit damage incurred as a result of the recession.  In the next two to three years, these same potential buyers will once again be able to qualify for traditional financing.
• Households are being formed at a later age, usually in the late 20s or early 30s.
• Many individuals forced out of the housing market due to foreclosure have moved in with others instead of becoming renters, thereby artificially lowering the actual number of potential households

If you look at the housing boom between 1970 and 1980, you saw the baby boom generation turning 25, which was then the prime time for families to purchase homes.  We are now entering a phase where the “Echo Boomers” (the children of the baby boomers) are entering their late 20s and early 30s.  A significantly larger group compared to their parents preparing to create households.

Combine this with record low interest rates, record high housing affordability, and the re-emergence of households removed from the marketplace due to economic factors, and you’re looking at the potential for a sharp rise in housing demand in the near future.  We believe that many people who were waiting on the sidelines to jump into their first home, waiting to feel more comfortable with the market and regaining the ability to jump back into home ownership are now slowly beginning to make their way into the marketplace.

Additionally, what is Residential Real Estate but a “basket of commodities” comprised of the raw materials plus the costs of labor.  During a period of moderate inflation and stagnant real wage growth as seen between 1970 and 1980, the cost of building a new home continued to grow.  If you were to invest in a cash-flowing property in the early 1970s, you were able to generate profits via the growing difference between purchasing power (reduced by inflation) and the costs of new home building (raised by inflation).  In essence, you were able to purchase this “basket of commodities” at a fixed pre-inflation price while your rental income, the value of the raw material and trade labor increased with inflation over the same period.  We feel very strongly that a similar pattern is about to emerge in the Southern California market. Currently we can purchase cash-flowing property at below replacement cost, further increasing the benefits of inflation.