Housing Bubble II: But This Time It’s Different

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

We have seen it for several years now: foreclosure sales—there were 5 million since the peak of the housing bubble—have become the hunting grounds for investors with two goals: hanging on to these homes until the Fed’s flood of money drives up their value; and defraying the expenses of ownership by renting them out. And funds have a third goal: collecting management fees. Thousands of smaller investors have piled into the game. And so have the giants.

Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg, to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work.

Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami. It had an impact. In the latest Case-Shiller report—a three-month moving average for October, November, and December—home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble. Las Vegas popped 12.9%, and Phoenix 23%. It’s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%.

“We recognized that prices were moving faster than people expected,” explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, they’re still “finding opportunities to buy.” They might not be able to rent them out very quickly, but they’d rather not be “missing out on a few points in home price appreciation.” The race to buy is on. The next housing bubble is inflating.

And that’s great. Money—which the Fed hands to its cronies at the frenetic pace of $85 billion a month—magically finds places to go and drives up values, and transactions take place, and paper gets shuffled around, and homes change hands as banks get out from under them, and fees and commissions change hands too. It inflates GDP, which is what everyone wants. And Chairman Bernanke can contort his arm slapping himself on the back.

Trying to rent these places is another story. Housing is zero-sum: when you move into a new place, you move out of the old place at the same time. So it becomes available. And someone else goes through the same process. Only household formation solves the problem of vacant homes—but that takes years or decades.

Best of all, these formerly foreclosed homes have now been pulled off the for-sale inventory list. Hence the “tight” inventory. And they’ve been transferred to the for-rent inventory list where they don’t bother anyone. Except the owners. Colony Capital, for example, with its 7,000 homes, has an occupancy rate of 53%.

Suddenly, the market for single-family rental homes—unlike apartments, which cater to different people—has turned into an elbow-to-elbow affair. The pressure on rents is huge. Year-over-year, rents edged up only 0.5% in Atlanta and dropped 1.7% in Las Vegas. For Phoenix, Bloomberg cited Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency: median rent per square foot rose 3% year-over-year in February 2011, and 1.5% in February 2012. But in February 2013, it fell 3%.

This tendency was confirmed by others. On the west side of Phoenix, where investors have concentrated their purchases of single-family homes, rents dropped by $100 a month last year—a stunning 10%!—according to James Breitenstein, CEO of Landsmith which has dumped most of its Phoenix properties. He is seeing similar pressures in Las Vegas and Atlanta. “There’s a whole bunch of rental supply that’s coming on that used to be sitting empty in bank portfolios,” he said.

Timing couldn’t be worse. Occupancy rates of single-family rental homes are already low— 53% for Colony Capital. But investors are buying ever more properties and flood the rental market with them. Just when the stream of people who’ve gotten kicked out of their foreclosed homes is tapering off. With rising costs and declining revenues, the rental part of the business model collapses.

As the Fed’s money is trying to find a place to go, prices may continue to rise. But with the economics to support these prices—namely rental revenues—giving way, the remaining reason to buy would be a singular hope: economically unsustainable price appreciation. The definition of a bubble. At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again.

Dallas Fed President Richard Fisher often warned about the nefarious effects of this flood of money. But he was shuffled off to “an out-of-the-way ballroom” at the CPAC, where Republicans struggled with the future, and drew barely two dozen people; yet he had a pungent message. Read.... The Fed’s Token Voice Of Reason: Megabanks Undermine Americans’ Faith In Democracy.

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flacorps's picture

Still got seven sitting empty (that I know of) and I only pay attention to about 100 homes in my 1, 000 home neighborhood.These are being held off the market as homes are bought and sold fairly readily here.

Tom.the.Bomb's picture

Neighbor just took a shortsale (via banks approval) of 230m for a house bought @ 310.  80k loss to the bank, mark to market at its purest.  Also the house is worth – tops 180.  A professionally employed couple and child, now forced to the rental market.  Heck… they can put their security deposit and first month rent on their “credit” card.  That is… if they can still use it.   

SmittyinLA's picture

We need a detached single family home rent revenue tax.


boeing747's picture

Some people here think Fed is free lunch giver, but actually Fed is hair cutter. Fed will raise interest rate between 2015-2016. US gov can not pay interests, not problem, sell gold, sell national parks, sell everything to Fed.

Arthur's picture

In decent neighborhoods, the Chicago rental market is strong for single family homes.

hard for regular folks to qualify for a mortgage these days so many are stuck renting depite the low rates.

The rich just get richer and I am happy to tred water.



Seasmoke's picture

the thing alot of people are missing.......is once the homeowners got a taste of living mortgage/rent free.......it is very hard, i say impossible, to go back to 2006 mentality

CheapBastard's picture

I see so many empty houses sitting around...some with broken fences and all with untidy lawns. Yet, "they" are building over 6,000 new houses in the area. I don't know who they are expecting esp since rents are beginning to fall there are so many boxes on the market.

A sad side effect of these largely rental neighborhoods is they turn to slums very fast. The handful of actual owner-occupied houses feel the impact with "bad" rental neighbors and a trashy neighborhood surrounding their house and of course, sinking property values and higher crime.

SmittyinLA's picture

We have legal immigration levels of over 200,000 additional new people per month.

pfairley's picture

Bubble?  Just stating the facts without attemps to sensationalize can make better reading..... 3% drop in rents!! 10%? horrors!! 

The worse horror is that rents rose so much before with lots of houses vacant. Also our left wing lawyer hustlers and politicians have long attacked small landlords so hard in housing court that only deep pocket big guys can survive the legal costs and vacancy rates.... 

 This is another chapter of that sad story.

Arthur's picture

"Also our left wing lawyer hustlers and politicians have long attacked small landlords so hard in housing court that only deep pocket big guys can survive the legal costs and vacancy rates."

Too true..Just check out the Chicago Landlord Tenant law 


ebworthen's picture

Renting a house sucks; higher utility bills, more repairs, higher rent.

Bubble Part II for certain.

If it isn't a bubble, why is the FED still putting in $85 BILLION per month?

Zer0head's picture

depends on how competent your landlord is. BX as a landlord will be ruthless emeffers by way of their surrogates


this is their front



and make no mistake miss a rent payment and you will be out on your sorry ass along with Grandma, the wife and the little deers

Ban KKiller's picture

I am living in my house for free but it is not my fault. I showed the court that the "bank" was using forged/fraudulent documents in the foreclosure complaint against me. The banks greed got them. Ha-fuckin-ha! Next is a quiet title suit to clear up everything. Ta-da! Death to big banks by a thousand cuts....that is what is happening to them. It helps to know they are all insolvent, ALL. Thanks to their derivatives! You know...what Cyprus bought when they were flush with mob, investor, tax cheat money. Sweet!


Stares straight ahead's picture

I have sex with incapacitated drunk minors! But it is not my fault that they let me do this heinous act! Ha ha! I win, I think...

jim249's picture

I would be willing to bet that you also have an Obama phone and collect food stamps. Fucking leach!

TheFourthStooge-ing's picture

That's exactly what he said to the bank.

de3de8's picture

A house is your home, shelter, privacy,etc.etc. but should never view as investment. If it appreciates treat it as found money, never count on it.

besnook's picture

for most people a home is their largest asset. it better be treated as an investment. if it isn't treated as an investment it is no more than a money pit that has few advantages over renting.

a home is where your underwear is stored. a house is just a freaking building that helps sell the land underneath it. find a good piece of land with a house on it or build one there and it will provide a future for you.

your post is real estate agent pablum to get you to buy a useless house in a useless developement that serves as a sinkhole for your hard earned cash in the form of granite counter tops, opulent bathrooms and plumbing repairs.

my present home is one of my best scores. we bought it in 2011 for 400 grand with no money down because it appraised at 550 out of the gate(classic case of a bad divorce and cosmetic issues costing nothing to fix but enough to stop the usual homeowner from buying.) and a neighbor is asking 750 for a smaller home, without the view on a smaller lot today. pay me 1.25 mil and it can be yours. i will  be happy to store my underwear somewhere else.

disabledvet's picture

the Fed appreciates your service to the cause. having said that "housing prices" should never appreciate actually. i do agree that "they're money pits"...but that's is what we humans do..."improve upon our condition to the best of our ability." if the entry point is $7500 it's a lot more achievable than if the entry point is $750,000 yes? yes? simply put what the "bubble clowns" don't realize is what backs the bubble in the first place. it's called DISCOUNTED CASH FLOW. so once the market corrects...as it always will...so will housing "only more so." since what is called "housing" in this iteration of "crazy bubble Fed land" is called "an apartment REIT" i really fail to see the value actually. where is the land? where is the property? sorry but living on a postage stamp in the sky strikes me as rather odd to begin with. "i'd rather live on a house with wheels" as they say.

q99x2's picture

I don't know what it is like in other states but to evict a couple from a California home (a couple that doesn't want to leave) can cost upwards of $65,000. And if your father is an attorney that is helping you the costs could wind up much more.

Investors investing into bulk single family homes are morons..

fortune114's picture

In Texas it's pretty easy.  $101 in court fees plus your time at a hearing.  Basically, if they can't prove they paid, they're evicted.  So as a small landlord you don't even need an attorney.

squid virtuous's picture

around here they are building homes like crazy, but nobody is buying, and the existing home "for sale" signs are popping up like spring daffodils

j0nx's picture

Thanks for clarifying where 'around here' is. <rolls eyes> Why bother posting this without clarification as to where around here is...

hannah's picture

all the idiots claiming that they bought RE in the last couple of years and are no going to sell at a huge profit are bullshit. the hedgefunds bought bulk rate deals from the banks and the us gov. the houses were heavily discounted and the loan money was virtually free...the big banks have no intention of renting the units out. they will package the units and sell securitites. they will never collect rent just like they never collected mortgage payments.


the point is/was to create securities to sell off...and then let th fed gov clean up the mess.

skipjack's picture

...cash flow matters...

Who's paying the property taxes, the insurance, and who's paying the grasscutters ?

hannah's picture

no one is you stupid fuck...?! taxes havent been paid for years now. why do you think california is broke..?

dolph9's picture

America is a plantation for the super rich and Jews who are closest to the Fed's spigot.

Do any of you doubt it anymore?

CoonT's picture

Only now they have off-shored their slavery operation since they realised they don't even need to chain Chinese people together. Instead of bulky leg shackles and tedious whipping sessions, they just install suicide nets around the "factories" so the sneaky little buggers can't even Dutch out..

Zer0head's picture

All I know is that in my part of SWFL the flippers are back and making good $$$.  Summer 2010 likely was bottom - the good stuff is being snapped up at all price levels - at least 30% up off the bottom from what I can see. Sustainable - what is sustainable but if you missed the boat you will be poorer for it.


As for BX don't underestimate those fuckers.

mumbo_jumbo's picture

LOL, zerOhead, 2005 wants it's meme back, this time WILL END just like last time only this time it's corporate money and they will not sit on properties and as stated above they got them at fire sale prices which means they can upload from far lower price than now and still make money but then whoever is the last one without a chair gets the shaft....so it's gonna be another train wreck.

Zer0head's picture

Dear Mumbo:

we agree, but it is all a question of timing e.g. the sun will explode at some point in the future

riphowardkatz's picture

200k home up 30% = ~285k-carrying costs(8k)-minus improvements(15k) minus short term capital gains(21k)-realtor and closing fees (15k)= peanuts plus lots of risk. enjoy those profits... 

Bobportlandor's picture

It's worse then an 0 sum gain. Investing in housing for the soul purpose of inflation taking it up is stupid as hell.

You can't inflate without two buyers bidding the property up.

You can't inflate rent without a renter income to support that rent.

People don't have savings, good jobs or the money to retire, so where the hell do you think your going to get the inflation from?

Housing relative to everything else is a bad investment. I suppose if I had billions then loosing it in rundown real estate is more preferable then in some other assets, but when these hedge funds start loosing their clients money I wouldn't want to be them.

Lucius Cornelius Sulla's picture

The FED is furiously printing money but the velocity is pegged at zero.  No velocity, no inflation.  Lenders aren't lending and consumers are not borrowing.  The economy is tapped out.  The only takers of debt are government and students.  It can't go on forever.  The amazing monetary money pump is broken beyond repair.  The only thing that will fix it is a massive deflationary credit collapse.

Bunga Bunga's picture

Even during the hyperinflation in Germany many landlords went bankrupt. Reason: rent control but exploding cost.

rsnoble's picture

I'm still trying to figure out how investors are planning $1k monthly rents (even in places like Detroit) when people still don't have jobs or jobs that pay dirt?  Another greedy bunch that's going to get flushed.  And more bailouts from the jobless who can't afford their fuckups.  Again.

Fix-ItSilly's picture

Demographics!  Demographics!  Demographics!  Baby boomers are retiring,  Dying.  Need access to downtowns - not 15 minute car ride home locations.  There's too much housing and it is not properly located.  This is a stupid, failed investment strategy unless the Fed can keep filling the hot air balloon ever more so to fight real estate reality.

IdiocracyIsAlreadyHere's picture

Not to mention the market for SFH rentals is by nature a small slice of the overall rental market.  The largest segment of rental market is one that naturally gravitates towards apartments:  college students, single adults, young couples, retirees.  The SFH home rental market mostly consisted of families who needed the flexibilty to move b/c of job, family situtations, military commitments - not an expanding pool.  Did they really think that everyone who got forclosed out of there McMansion would be lining up to rent the same house at inflated rents?  Fools.  Can't what until it blows up in the hedgies faces.  Can't think of much better justice!

kaiserhoff's picture

From what I have seen in Florida, there are two real estate markets.

One - for the Realtors, is in fact tight, but only contains squeaky clean properties with sound owners and no visible deed/condo/maintenance problems.

Two - a shadow market of foreclosures in process, attempted short sales, owners holed up - not moving, not paying is almost infinite in scope.  In the center of the state I would guess about 50% of all property.

Here's the kicker.  Commercial real estate is as bad or worse, and the idiots are still building.

neidermeyer's picture

The smart people who lawyered up and are holdng on are slowly winning against the banks ,, the investors that put up the funds that JPM/GS/CW/BAC and others gambled with creating the first bubble AND the homeowners are using the same arguments to win ,,, both ends against the "smart" middleman who thought they could fool everyone forever..

the grateful unemployed's picture

reminds me of what happened to farm land in the 30's

Diogenes's picture

Home prices up 9.9% (Atlanta) 35% (Phoenix) etc etc.

All those people who bought distressed real estate cheap, between 2009 and 2011 don't look so crazy now do they.

I started selling mine last year and will list the rest this spring.

Element's picture

Good luck, but just remember, the wave of Sovereign defaults will come. ;)

mmanvil74's picture

Yup.  I couldn't convince anyone on ZH that it was time to buy US housing since 2009, especially Las Vegas, Phoenix, and Miami.  I'll admit that the "no brainer" deals of a few years ago are mostly gone now.  The big funds have moved in and popped prices up and softened rents, both of which should be expected in a market that was so grossly oversold.  

Historically annual rents average 5% of house prices, they are still above that level now in most markets.  Rents would have to fall further and prices rise further before we come anywhere close to another bubble or even revert to the mean.  At bubble levels annual rents to prices are closer to 2% or 3%.  And in this environment, especially if you have access to ZIRP or even sub 4% FHA guaranteed mortgages, what else earns 5%+ p.a. which equates to 25% p.a. ROE if mortgaged, not counting any apprecation, and including expected vacancy?  

I do think the easy money in US housing is mostly behind us by now, but the numbers in this article make it sound like hedge funds have taken over the housing market, when in reality they are 15% - 20% of the market at best, and only that high in select markets.  20,000 homes is a drop in the bucket when measured against the entire US housing market, and let's not forget these hedge funds are mostly private equity with at least some real money on the table, not the zombie qualifiers with no money, no credit and no job, that blew the last bubble.  

I just wish I could have bought more at the lows in 2009 and 2010.  Nothing wrong with taking profits here, although if you have everything leveraged at 4% fixed for 30 years, may as well hold for the long haul.

Lucius Cornelius Sulla's picture

"Historically annual rents average 5% of house prices"

This is only true for the past 15 years.  Prior to that annual rents (gross cap rate) averaged about 10%.  Phoenix actually did exceed the 10% gross rate a few years ago so there were pockets of bargains in the USA.  However, most markets (especially on the coasts) are still way over valued IMHO.

Buck Johnson's picture

CNBC is doing everything they can to help push this new housing bubble.  It's going to end badly.

spinone's picture

when interest rates revert to the mean of 7%, and mortgages are at 10%, your $300,000 house at 4% will be worth $155,000 to keep the mortgage payment $1500.  I hope you get out before the exits get crowded.