Tuesday, November 26, 2013

Housing Market Missive...Crisis Redux???

A friend just sent me an article that talked about how large private equity firms are buying homes in large numbers for the purpose of renting them out, and in many cases, securitizing the rental income flows.  He asked for my thoughts, which are cut/pasted below, fyi….

Much of the popular data, at the headline level, leads many people to believe that the housing market has been in a massive recovery for a long time!  I’ve doubted it, and once you dig deep you find some telling facts.  For example, first-time-home-buyers, which means the historic mainstay of housing demand, usually young couples who are just starting out in life, buying their first home, have been dropping in numbers on a grand scale!  Also, housing affordability has dropped, only partly because rates have gone up in the past six months since ‘tapering’ talk began, but more because the whole housing frenzy in this country leading up to the ’08 collapse was fueled by very low-interest-rate floating mortgages.  Now, mortgages are mostly coming in the form of fixed rate long term mortgages which are much more expensive and come with tighter lending standards.  So traditional housing demand has gone away.  The latest housing data showed a big increase in people buying condos instead of homes, probably because condos are cheaper and usually require less overhead than a home.

So a bigger and bigger part of the housing market has been going to the professional investors who are buying en masse in order to either flip or to rent.

In some parts of the country, there are serious supply/demand imbalances, especially in the West.  Lots of the supply has been taken up by the professional buyers, and lots of the supply came in the form of foreclosures or short-sales which was low-hanging fruit that has been picked, and builders have been slow to build new inventory.  So even though housing prices have gone up, the supply is still relatively limited when compared to new-household formation.  With big growth in new-household formation, one might expect more new construction to be forthcoming, but as stated above, some of the demand for housing has gone away (to condos or to rent). 
Optimists would argue that with the now higher housing prices, more supply will come onto the market as sellers will spring up now that they’re able to sell their homes ‘above water’.
Pessimists argue that the housing situation has only gotten marginally better, or less bad, but that it’s not reflective of a genuine sustainable demand. Rather it’s based on the investor/professionals who are only buying for rental income.  That’s pessimistic because it presumably means that fewer Americans are buying homes, and therefore the usual multiplier spending effect that comes with home purchasing is likely to go away or at least be quite diminished!
I’m a bit in the pessimistic camp.  I think the American dream of owning a home and seeing that home as being a primary savings vehicle has been very dented.  I think a whole new generation of young people are not looking at home ownership the way I did when I was their age.  As such, they’ll likely choose to rent instead of buy.  And the professionals who own these properties, will either benefit from the rental income returns, or will start to unload those investments and then we’ll see a big pick up in supply, and then a further drop in home values! 
Housing crisis redux???
We’ll see….

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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