In the groundbreaking movie “The Big Short,” one of the central themes was the importance of being able to see what others cannot or will not. By refusing to play along with the masses, the protagonist — hedge fund manager Michael Burry — initiated a contrarian trade, resulting in likely the biggest profitable transaction in modern history when the housing bubble collapsed in 2007.
Although an incredibly intelligent and talented individual, it was neither attribute that drove him to the iconic housing crisis trade. Instead, it was his openness to look at the data, despite the rankling of the broader public, who labeled him as a kook. Taking subjectivity out of the picture, Burry reasoned that — while he may not get the timing perfectly — in the long run, the real estate market was untenable.
In the end, it was Burry that was proven correct. As he hypothesized, there were too many outstanding loans featuring adjustable rate mortgages. There weren’t that many people that could afford those payments; thus, a housing bubble existed. That only meant that a housing crisis was inevitable.
Today, we’ve learned the lessons of ten years ago, or have we? Recently, I was provided data of the San Diego, California rental market. In a word, it’s insane: bats–t crazy insane. In the six short years from 2011 through 2016, the average rental market jumped from $1,341 to $2,045, or a whopping 52.5% increase! In other words, rent has increased by a margin of nearly 9% every year.
Here’s the problem — nobody has ever seen a consistent 9% raise in their salary (unless you work for the government). In this day and age, you’re lucky if you get anything at all. Many corporate ladder climbers can attest that painful performances in the financials often means that management gives a speech about how “we all need to stick together.” In extreme cases, that implies layoffs. In lesser cases, it means kiss your performance review goodbye.
This leads us to why we could be facing another housing crisis. According to the City of San Diego website, the “median income for a family of four in San Diego is $63,400.” With taxes and other considerations, this amounts to, at most, a $3,500 net monthly income. Since the rental market takes $2,000 of that right off the bat, this average family is left with $1,500 to pay for all other expenses.
Tack on the expenses associated with record-breaking education bills, and you truly have a situation where American families cannot get ahead. In such conditions, they have no alternative but to pack up and head for more tolerable living environments. But then that takes economic activity away from San Diego. If more people leave, that puts noticeable pressure on the overall economy.
Thus, this housing bubble isn’t just impacting those that can’t afford their bills. There’s a risk of working population decrease unless cities like San Diego address this housing crisis. Unfortunately, real estate is one of those sectors that are slow to respond. At this point, there’s nothing to do except watching your leverage and being careful about too much exposure to a housing bubble gone mad.