A New And Different Housing Bubble Is Taking Shape

Posted By Shawn Pillion @ Mar 27th 2013 9:46am In: Buyer Info

A New And Different Housing Bubble Is Taking Shape

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.

Charleston Real Estate Bubble

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

By Wolf Richter

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