While it isn't news to regular readers, the fact that one of the key pillars of the "housing recovery" (the other three being foreign oligarchs parking cash in the US courtesy of an Anti Money Laundering regulation-exempt NAR, foreclosure stuffing and, of course, the Fed's $40 billion in monthly MBS purchases) have been the very biggest Wall Street firms (many of whom had to be bailed out the last time the housing bubble burst) who have also become the biggest institutional landlords "using other people's very cheap money" to buy up tens of thousands of properties, appears to still be lost on the larger population.
Intuitively this is to be expected: in a world in which the restoration of confidence that a New Normal, in which everything is centrally-planned, is somehow comparable to life as it used to be before Bernanke, is critical to Ben's (and the administration's) reflationary succession planning. As such perpetuating the myth of a housing recovery has been absolutely essential. Which is why we were surprised to see an article in the very much mainstream, and pro-administration policies NYT, exposing just this facet of the new housing bubble, reflated by those with access to cheap credit, and which has seen the vast majority of the population completely locked out.
The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.
Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.
“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Ratings. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”
We have quantified the massive footprint of the New Normal's landlords in the past, but here it is again from the NYT:
Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough.
To be sure, the supportive spin is already in place - primarily by those who stand to benefit by this dynamic:
“When people write the story of this housing recovery, these investors will be seen to have helped put the floor under the housing market,” said David Bragg, an analyst at Green Street Advisors. “In some of the key markets, that contributed to the recovery.”
The reality is somewhat different:
The story, though, often looks more complicated on the ground. Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year, according to CoreLogic.
But Mr. Cusumano said he wondered if faraway investors would properly maintain the homes they buy. He said that Invitation Homes had been willing to put money into the properties, but he was not so sure about the other players. He also worries what will happen when these investors start selling, as they inevitably will.
“The thing that scares me is the values going up so quickly,” said Mr. Cusumano. “That’s what happened before and that’s what’s scaring me. Is this going to happen again?”
And what's worse, as we reported last week, the top is already in and many of the deep pocketed investors have started pulling out:
Yet some investment companies are already pulling back in the markets that have had the fastest growth. In Phoenix, the percentage of all house purchases involving investors fell to about 25 percent in March from a high of 36 percent last summer, according to the Campbell HousingPulse Survey. The same survey shows that investors have been increasing their presence in new areas like Florida and California.
All of this has made it hard for house hunters like Jeff Martin, who is looking to buy a fixer-upper in Riverside County. Mr. Martin, 58, has made offers on 15 houses over the last year. Last Wednesday, he received his latest rejection. On most of the houses, Mr. Martin has lost out to investors offering all cash.
Mr. Martin, a retired Navy veteran, puts much of the blame on banks that have been holding onto empty houses, lowering the supply of available homes. He said he has trouble faulting the investors, given that he was involved in real estate financing during the last boom. But he is worried that if mortgage rates begin to rise he will lose out on his opportunity to buy. Rising mortgage rates could also lead to a broader slowdown in the real estate recovery.
Mr. Cusumano said that the investors he works for have been trimming back their purchases in the area. His agency closed on three houses for investors in May, down from eight in February.
The conclusion: the second housing bubble may have already popped: "the fevered pitch of the market has not died down."
In fact, scratch may and replace with has. The following comment from Mark Hanson should pour cold water on anyone who still harbors any delusion that there is a "housing recovery" or that any transitory, cheap-credit driven price hikes, will persist.
Mass Layoffs in Mortgage Space
Large scale, sudden mortgage finance job loss on deck...will impact weekly claims. Rates a stiff headwind to house prices, bank earnings, consumer spend, home improvement et al.
After 5 years of interest rates being forced incrementally lower each year -- and everybody that qualifies refinancing over and over again allowing the banks to originate and earn several points off of each gov't loan churn -- the jig is up for a while at least. The mortgage market is now so efficient -- and rates have been at historic lows for so long -- there is simply nobody on the proverbial "fence".
This morning I was made aware that three large private mortgage bankers I follow closely for trends in mortgage finance ALL had mass layoffs last Friday and yesterday to the tune of 25% to 50% of their operations staff (intake, processing, underwriting, document drawing, funding, post-closing). This obviously means that my reports of refi apps being down 65% to 90% in the past 3 weeks are far more accurate than the lagging MBA index, which is likely on its' way to print multi-year lows in the next month.
As I stress in the note below, the "refi capital conveyor belt" is a quiet, yet powerful economic driver. Not only do refi's grease homeowners balance sheets and have been responsible for the lions'' share of mortgage-centric US banks' earnings over the past few years but they are huge for the labor market.
With respect to jobs, well over 100 individuals touch one refi from loan application printing/shipping, up-front processing (appraisal, credit, bank/job verifications, title, escrow etc), to lender underwriting, document drawing, and funding, and through post-closing including securitization and trustee services. So when the refi door slams shut it's a macro headwind for which few account. In fact, many model the exact opposite...that rising rates is great for banks and the economy.
Bubbles: because this time is always the same.