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The Big Investment Firms Driving the Housing Market

Well, look who finally figured out that the “housing recovery” is a big, fat fraud?

The New York Times, that’s who. Check out this clip from the Times June 3 edition:

“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.” (“Behind the Rise in House Prices, Wall Street Buyers“, New York Times)

Whoa! So investors are driving the market, you say? Who woulda’ known?  If Times reporters spend a little more time perusing the housing blogs instead of cheerleading the fake recovery, they would have known what was going on 8 months ago. Instead, it’s like Iraq all over again where the Times braintrust waited a full year before they figured out the whole WMD-thing was a hoax designed to drag the country into war. Way to go, Keller. Here’s more from the same article:

“Wall Street played a central role in the last housing boom by supplying easy — and, in retrospect, risky — mortgage financing. Now, investment companies like the Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest…..

While these investors have not touched many healthy real estate markets, they are among the biggest buyers in struggling areas of the country where housing prices have been increasing the fastest. Those gains, in turn, have been at the leading edge of rising home prices nationwide…..

Nationwide, 68 percent of the damaged homes sold in April went to investors, and only 19 percent to first-time home buyers, according to Campbell HousingPulse.” (NYT)

“68 percent”! Unbelievable. In other words, there’s no real “organic” demand for detached single-family homes at all. It’s all just Wall Street hustlers throwing their money around hoping for a better return than they’re getting on uber-risky junk bonds.  Here’s more:

“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.” (NYT)

Yes, Mr. Cusumano, it’s true that when one customer buys the bulk of the homes that are listed in an area, prices tend to rise. What a surprise.

“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?”

No, it won’t; not unless the banks start dumping their stockpile of 5 million  distressed homes (shadow inventory) onto the market.  But there’s no sign that they plan to do that. They want to release the homes in dribs and drabs so they can keep prices high and reduce their losses. But that doesn’t mean that prices won’t flatten out or even drop a few percentage points. They probably will,  just as soon as our Wall Street speculator friends realize that the housing biz is not what it’s cracked up to be, it’s not easy money.  According to the Times notes, some of the moneybags bigshots have already figured that out.  Check this out:

“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.”

So the speculators are trimming their commitment already. As prices rise and profit margins shrink, they’re going to leapfrog from one depressed market to the next until they’ve had their fill. Here’s more:

“In a sign of the potential peril ahead, some of the investment firms have recently taken the first steps to cash out.

The investment fund financed by Colony Capital filed last week to go public, the second firm to do so in May. Another early player in the business, the Carrington Holding Company, said last week that prices had risen too far, leading the firm to begin selling some of its holdings.”

The Carrington story is actually pretty funny. (when you hear the details)   Carrington’s manager Bruce Rose was one of the first big investors to get into the housing game. Now with prices rising as fast as they are, he’s calling it quits. Here’s what Rose told Bloomberg News:

 “We just don’t see the returns there that are adequate to incentivize us to continue to invest. There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”

Why does Rose characterize housing speculators as “stupid money”?

Probably because it’s a lot harder to manage distressed properties than the big Private Equity firms seem to think it is. Lawns have to be cut, roofs have to be patched, and toilets have to be fixed. It’s not easy to hit your profit targets either, especially when prices have soared 10.6 percent in the last year. Most of the gains have already been made, which means that Rose is probably smart to “get out while the getting’s good.”

Here’s more from Bloomberg: “Companies that release financial results for single-family rental investments have reported losses as they acquired homes faster than they can renovate and find tenants.” This just confirms what we’ve already said, that making money on housing is not a “sure thing.”

So, is there any indication that the PE boys are thinking out pulling up stakes and getting out of Dodge?

Uh huh. Check out this excerpt from an article at naked capitalism:

“The most popular view I heard last fall was that an exit via an IPO, with the rental business as an operating company, was the easiest and cleanest route. A portfolio of 1000 houses would be large enough to make for a decent-sized deal. But interestingly, back then, the assumption was that the portfolios would also need to have reached “stabilized yields,” meaning they were rented up and had seen a fair number of lease renewals so investors would know the turnover, vacancy rates, and costs associated with both making homes ready for the initial rental and freshening them up when a lease expired. That would take two to three years. We are well short of that timeframe. That means that investors will be buying a pig in the poke.”

Clever, eh? So Wall Street wants to heap these turds into one steaming pile and pawn them off on credulous investors. Where have we heard that scam before?

There’s no demand in housing, not really. It’s all smoke an mirrors. Existing home sales were down  in March even though the Fed is buying $40 billion in Mortgage Backed Securities (MBS) per month, even though interest rates are at their lowest level in history, even though Obama is providing “no doc” refis to people who haven’t paid a dime on their mortgage in two years, and even though the banks have reduced their foreclosures by 24% in the last year and the nation’s 3 biggest banks have stopped foreclosures altogether. Even with all the rate-stimulus, all the freebie mortgage modification programs, and all the stealth inventory suppression;  demand is still weak, weak, weak.

Why?  Because the fundamentals are weak, that’s why. Here’s how Fitch Ratings agency summed it up in a recent post at Zero Hedge:

“Fitch Ratings believes the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse…..Several factors are combining to form an environment supportive of brisk home price growth, but few are capable of providing long-term support to sustain the recent pace of improvement….

Demand is artificially high … We believe this level of housing demand is likely to abate once the pent-up demand is satisfied. …The supply is also artificially low….

The supply-demand imbalance is even more pronounced in regional markets that are seeing strong institutional and retail bids for rental properties. The low rate and steep drop in prices, coupled with the decline in homeownership, have attracted an estimated $8-$10 billion of new capital to this sector.”  (“Haunted By The Last Housing Bubble, Fitch Warns “Gains Are Outpacing Fundamentals”, zero hedge)

Finally some one is talking about fundamentals. And what are the fundamentals that traditionally drive the housing market?

Low unemployment and good paying jobs mainly, the two things that are sadly lacking in Obama’s bogus economic recovery. Until those improve, buying a house is just a crap-shoot. But don’t expect the Times to tell you that.

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 how the banks targeted blacks for toxic subprime mortgages appears in the May issue of CounterPunch magazine. He can be reached at fergiewhitney@msn.com.

 

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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.

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