There are wage pressures on Southern California employers as the minimum wage was just increased in the state and will be increased again in January of 2008. Not only has there been wage growth but finding good employees while never easy is especially difficult due to the low unemployment. The tight employment market with increase wages is a positive for us as rental housing providers.
In certain submarkets which are inhabited largely by first generation Latino immigrants, we've JUST (Q1 2007) started seeing a BIG jump in immigration sweeps by Immigration and Customs Enforcement (ICE) which was formed in the wake of 9/11. While motivation for the sweeps might be political, the reality is that like Bank of America and Western Union, we have been and are able to do business with the "undocumented" through use of other forms of identification (a Social Security Card isn't necessary). We recently lost 2 long term residents from a property in Santa Ana as they skipped (moved out without giving a 30 day notice) after ICE came looking to question someone in each household. Depending on the intensity and duration of the sweeps / enforcement, there will be a negative impact to our operations.
My opinion about the Southern California housing market is that prices have dropped even though the numbers released by the California Association of Realtors show slight gains. As we have a realty company (Beach Front Realty) and had several listings last year, our sellers' experiences were different than advertised by the realtors lobbying group. Houses are sitting on the market longer and serious sellers are lowering prices. If homes are "priced right," there are buyers in the market and properties do sell. The housing market has not crashed though and is still near historic highs.
In the apartment sector, the flow of funds into real estate continues although buyers started balking at buying properties with a capitalization rate lower than the rate of their 1st Trust Deed. This has caused prices to come down a bit. Prices for office properties have showed continued strength due to the tightening of occupancy which has pushed rents up, submarket specific of course.
On the horizon there are rumblings from lenders, particularly those who have made subprime loans (HSBC, New Century Financial, Countrywide) that lending standards are being tightened while reserves for non-performing loans are being increased. This will make it difficult for a large number of home owners to refinance since the lender holding their current loan (many are adjustable) now won't make a new loan to them. It will also take a percentage of potential buyers out of the market who have helped drive the housing boom. I am expecting to see a jump in foreclosures in the housing sector which will give apartments a temporary boost but should drag on the economy as a whole.
As I write this letter today, I must confess that while I look forward to making new purchases, Southern California is still too pricey while 2nd tier cities which might seem interesting by comparison are actually trading at historically low rates of return. Therefore, I sit on the sidelines waiting for investment opportunities that motivate me to risk my money which has been and always will be the prerequisite for creating new Beach Front investments. I'm always looking. . .
