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Housing Bubble II: But This Time It’s Different

testosteronepit'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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Tue, 03/19/2013 - 18:36 | 3350002 mmanvil74
mmanvil74's picture
Your theory implies that the FED stops QE, but I think we all know that QEternity is already baked into the cake.  The FED will print and print.  The US Treasury can't afford 7% interest rates.  I think house/condo prices in the US (in attractive areas, particularly those that cater to retirees) will double from here before mortgage rates get to 10%.  And I wouldn't touch mini-mcmansions at $300,000, the CAP rate sucks.  I like the lower end of the market at or below $100,000, so your theory implies those go from $100,000 to $50,000?  Again, I doubt it, those homes are already priced below construction costs.
Tue, 03/19/2013 - 20:07 | 3350350 skipjack
skipjack's picture

Who cares about inflated construction costs ?  Historically, houses have been 1-2x annual income.  Do the math - what is 1-2x annual median income in the US ?  Yep - about 70k max.  House prices have a long way to go down.  And we will.

 

In the mid-80s, with interest rates around 13%, I bought a townhouse - 3 bedroom, 1.5 bathroom - for $54k.  At the time my income was 28k/year, well above the median.

 

 

Tue, 03/19/2013 - 18:47 | 3350057 mumbo_jumbo
mumbo_jumbo's picture

at or below $100K????? WTF!!! i can't even get a 1 bedroom condo for that......and porbaly not even $200K.

Tue, 03/19/2013 - 17:05 | 3349511 Diogenes
Diogenes's picture

I'm not selling because I think the run up is over. I'm selling because I have enough money to retire. Not from the last 4 years, have been investing in RE since the seventies.

Tue, 03/19/2013 - 15:31 | 3349030 Element
Element's picture

Excellent input, and points.

I'd rather have an durable asset than a fungible bank account at the moment.

Tue, 03/19/2013 - 18:34 | 3349937 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

If you let that asset sit too long with no maintenance it will become "fungible" also.

 

In this market the only thing that makes sense to me assuming the numbers work, is to buy some foreclosed properties in a bad neighborhood for as cheap as you can get them. Find some homeless renters and get them signed up on as many government stimulus programs as possible and house them in the properties taking a cut off their aggregate stimulus money to pay the monthly mortgage plus a little extra for your efforts. It is a win, win all around on the conveyor belt of fiat funny money printing. Well at least till the tap gets shut off then plan b. I hear real estate is cheap in Detroit right now.

Tue, 03/19/2013 - 20:26 | 3350429 Element
Element's picture

Not if you use a house as a house ... crazy idea, I know.

Wed, 03/20/2013 - 08:37 | 3351606 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Of course, there is a saying you don't shit where you eat. If the whole market is turned into a cesspool it is kind of unavoidable.

Tue, 03/19/2013 - 17:21 | 3349562 11b40
11b40's picture

Well, maybe so, as long as those durable assets are shiny and portable.  

If they are costing you in taxes, fees, repairs, marketing, depreciation (deteriation), extra work & worry, and lost opportunity....well, maybe not so much.  

Tue, 03/19/2013 - 17:18 | 3349554 spinone
spinone's picture

In a deflation, value is destroyed wherever it aggregates.  Real estate and bank accounts, gold and fine art.  All will go down.  He who loses least wins.  Invest in things most essential to health and survival.

Tue, 03/19/2013 - 20:17 | 3350393 toys for tits
toys for tits's picture

 

 

All the hedge funds are racing to the next carnival ride.  hahaha

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