FacebookTwitterGoogle+RedditEmail

Is the Big Money Exiting Housing?

by MIKE WHITNEY

According to a report by Goldman Sachs, approximately 57 percent of the homes that were purchased in the first quarter of 2013 were all-cash deals. In 2005, the peak of the bubble, all cash buyers represented a mere 19 percent of all transactions. The amount of investor capital pouring into housing is unprecedented. Moneybag speculators and Private Equity firms have been loading up on real estate like it’s going out of style, and for good reason; according to this week’s Case Shiller report, housing prices soared more than 12 percent in the last year alone which means that the return on investment rivals the red-hot stock market. Of course, there is a downside to the rising prices phenom as Yale professor Robert Shiller pointed out on Tuesday in an interview on CNBC. Shiller said:

“[Housing today] is a speculative market that is driven by irrational exuberance that can suddenly change… It’s risky. …The momentum that we have seen historically may be weakening, because there’s so many more professionals in the market. It’s obvious to me what these hedge fund people are thinking. They’re thinking, the market has real momentum and it’s going up, so I can buy something and flip it a year later. (But) This idea of a lot of speculators in the market is not healthy.”

Analyst Diana Olick summed it up more succinctly on her Realty Check blog on Wednesday. She said:

“Housing has morphed from a form of shelter to one of the most popular tradable assets, thanks to a huge influx of institutional investors in a mammoth, albeit decreasing, supply of distressed properties. That is why it should come as no surprise the housing market is now nearly as volatile as the stock market.” (Realty Check)

Okay, so the flippers and speculators are back and there’s a little froth in the market, but does it really matter? After all, no one’s complaining, right?

Right. Not yet, at least. But that’s just because the hot money is still pouring in and pushing up prices. Once the speculators realize that they’re not going to make the killing they thought, then the money’s going to dry up, most of the equity gains of the last year will be wiped out, and there’ll be a stampede for the exits. And judging by the weakness in mortgage applications –which according Mortgage Bankers Association (MBA) have dropped 16 percent since early May–and the sharp decline in new home sales–which according to the Commerce Department plunged 13.4 percent in July–that day may have already arrived. The drop in mortgage applications suggests that demand for single family construction was already weakening when the Fed announced its plan to scale back its asset purchases. The announcement just made matters worse by pushing mortgage rates higher and putting the kibosh on future sales. Here’s Olick again:

“Investors made up just 16 percent of home buyers nationally in July, according to the National Association of Realtors, compared with 22 percent in February … During the worst of the foreclosure crisis, in some of the hardest hit markets, investors had made up more than half of all buyers…

Large funds like Colony Capital, Blackstone and Waypoint bought thousands of properties, and drove prices higher, faster than most expected. Now they are focusing on filling those houses with renters.” (Diana Olick, Realty Check)

There’s no “two ways” about it; if the investor share shrinks, prices will either flatline or tumble. But, where’s the proof that investors are throwing in the towel, after all, didn’t existing home sales just beat all analysts estimates?

Yep, they sure did. Sales climbed 6.5%, which was leaps and bounds over analysts predictions. But here’s the problem; existing sales data is based on closings in May or early June, before the rate increases took effect, so they don’t tell you what is going on in real-time. The truth is, we won’t know the extent of the (rate) damage until late September. Some analysts figure that September’s existing home sales are going be a massacre, but no one knows for sure. Even so, Wall Street is worried, very worried. Here’s a blurb from G-Sax in Capital Report:

“The Fed probably shares our concern about the recent numbers, strengthening the argument for continued support for the [mortgage-backed security] market,” even if it begins cutting back on asset purchases next month, Goldman analysts wrote.” (Goldman Sachs says housing has hit ‘a pothole’”, Capital Report)

In other words, Goldman thinks housing sales are headed for a cliff and they want Bernanke to keep buying the same amount of MBS as he is presently. Olick thinks there’s trouble ahead too and says so in this video piece that was released on Wednesday on CNBC.

Diane Olick: “I just got off the phone with Redfin’s Greg Kelman and he said he’s seeing a huge slowdown in existing home buyers now and says armchair investors who are using credit are getting out.” (“Housing takes a bearish turn”, Diana Olick, Realty Check, CNBC video)

Investors are getting out?

Yer darn tootin’ they are. Check out this report from Reuters titled “Higher prices sap foreign interest in U.S. real estate”:

“Foreign investors, who rapaciously scooped up U.S. real estate during the 2007-2009 recession, are backing away from the same markets they so eagerly jumped into a few years ago.

Real estate brokers say demand from international investors has flagged in locations that have been most attractive to overseas buyers – markets such as San Francisco, Phoenix, Las Vegas and Miami….

Calamitous declines in many of the nation’s housing markets during the economic crisis had attracted droves of international investors seeking to cash in on a weak U.S. dollar and rock-bottom property prices. Many were attracted to Sun Belt markets that had been battered by the crisis. The opposite trend is now gathering steam…

…real estate is no longer the bargain it once was for foreigners. That is discouraging new sales, while many foreigners who already own property – especially those who bought strictly as investment – are turning into sellers.” (“Analysis: Higher prices sap foreign interest in U.S. real estate”, Reuters)

There are three things going on here:

1–The banks have reduced the availability of distressed property in order to keep prices artificially high.
2–Property management, that is, transforming cheap, distressed property into rental units, is not as lucrative as many investors thought it would be.
3—Rates are nearly back to 2011 levels (5%) when the demand for housing was near zilch.

Bottom line: Foreign investors and PE firms with boatloads of cash have been driving the market. Now that’s changing. Take a look at this from Bloomberg:

“American Homes 4 Rent (AMH) yesterday fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss….

The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month… The Malibu, California-based company, which raised $705.9 million in the IPO, had a net loss of $14 million, or 15 cents a share, on revenue of $18.1 million in the quarter ended June 30, according to a statement this week.

Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants…

American Homes 4 Rent owned 19,825 properties for an investment of $3.4 billion as of July 31, according to its earnings statement. About 56 percent of the company’s homes were leased as of June 30.” (“American Homes 4 Rent Said to Fire Employees After Loss”, Bloomberg)

Property management just isn’t the golden goose these guys thought it would be, so they’re either trimming their sails or packing it in altogether. This trend will undoubtedly gain pace in the months ahead, especially now that the Fed’s rate stimulus has ended and the 30-year fixed is edging towards 5 percent, the red zone.

In any event, the slowdown in housing is here, it just hasn’t shown up in the data yet. I expect the Fed to surprise everyone with an announcement that it plans to INCREASE its monthly purchases of Mortgage-Backed Securities (MBS), even while it “tapers” its purchases of US Treasuries. (UST)

Bernanke has roughly 4 weeks to avoid a full-blown train-wreck in housing sales. If he doesn’t push down mortgage rates fast, he’s going to have a bloodbath on his hands, and that’s probably not the way he wants to be remembered.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on the Fed’s quantitative easing disaster appears in the August issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:
June 30, 2016
Richard Moser
Clinton and Trump, Fear and Fascism
Pepe Escobar
The Three Harpies are Back!
Ramzy Baroud
Searching for a ‘Responsible Adult’: ‘Is Brexit Good for Israel?’
Dave Lindorff
What is Bernie Up To?
Thomas Barker
Saving Labour From Blairism: the Dangers of Confining the Debate to Existing Members
Jan Oberg
Why is NATO So Irrational Today?
John Stauber
The Debate We Need: Gary Johnson vs Jill Stein
Steve Horn
Obama Administration Approved Over 1,500 Offshore Fracking Permits
Rob Hager
Supreme Court Legalizes Influence Peddling: McDonnell v. United States
Norman Pollack
Economic Nationalism vs. Globalization: Janus-Faced Monopoly Capital
Binoy Kampmark
Railroaded by the Supreme Court: the US Problem with Immigration
Howard Lisnoff
Of Kiddie Crusades and Disregarding the First Amendment in a Public Space
Vijay Prashad
Economic Liberalization Ignores India’s Rural Misery
Caroline Hurley
We Are All Syrians
June 29, 2016
Diana Johnstone
European Unification Divides Europeans: How Forcing People Together Tears Them Apart
Andrew Smolski
To My Less-Evilism Haters: A Rejoinder to Halle and Chomsky
Jeffrey St. Clair
Noam Chomsky, John Halle and a Confederacy of Lampreys: a Note on Lesser Evil Voting
David Rosen
Birth-Control Wars: Two Centuries of Struggle
Sheldon Richman
Brexit: What Kind of Dependence Now?
Yves Engler
“Canadian” Corporate Capitalism
Lawrence Davidson
Return to the Gilded Age: Paul Ryan’s Deregulated Dystopia
Priti Gulati Cox
All That Glitters is Feardom: Whatever Happens, Don’t Blame Jill Stein
Franklin Lamb
About the Accusation that Syrian and Russian Troops are Looting Palmyra
Binoy Kampmark
Texas, Abortion and the US Supreme Court
Anhvinh Doanvo
Justice Thomas’s Abortion Dissent Tolerates Discrimination
Victor Grossman
Brexit Pro and Con: the View From Germany
Manuel E. Yepe
Brazil: the Southern Giant Will Have to Fight
Rivera Sun
The Nonviolent History of American Independence
Adjoa Agyeiwaa
Is Western Aid Destroying Nigeria’s Future?
Jesse Jackson
What Clinton Should Learn From Brexit
Mel Gurtov
Is Brexit the End of the World?
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Doug Johnson Hatlem
Alabama Democratic Primary Proves New York Times’ Nate Cohn Wrong about Exit Polling
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
FacebookTwitterGoogle+RedditEmail