Distressed properties hitting the market will pose a challenge to rising prices - Image credit:... [+]
Ben Bernanke can pride himself in having contributed to the housing recovery by pushing interest and mortgage rates to record lows, but he seems to have encouraged the wrong type of buyers. A report by Radar Logic shows that the share of institutional investors in the housing market is rising, to the point that the entire year-over-year gain in aggregate transaction activity was fueled by them, as opposed to home owners. While everyone and their grandmothers are now bullish housing, a massive shadow inventory and the specter of traders, rather than homeowners, playing the market suggest it’s not all roses going forward.
Data to March 2013 on 25 metropolitan areas compiled by Radar Logic show institutional investors accounted for 12% of home purchases, up from 9% a year ago. You say 12% doesn’t sound like that much? Stripping institutional investors from the statistic, home purchases actually declined on a yearly basis.
“Institutional money has decided there’s a good return somehow and somewhere in housing,” explained Michael Feder, Radar Logic chief executive, who explained that institutional investors are both large shops like Blackstone and smaller players that have bought up a few properties via structures like LLCs or trusts. “The idea is the same [regardless of their size], they come in and drive prices up by absorbing supply,” Feder added.
The trend isn’t new, but it takes on added relevance as their share of purchases increases, having an “outsized impact on housing prices.” The institutional housing trade is a highly localized phenomenon, particularly relevant in some of the worst-hit markets—the same ones which are experiencing some of the most impressive gains in prices.
Back in March, Forbes’ Morgan Brennan reported on the impact institutional investors were having in Phoenix, where prices jumped 23% last year and the share of institutional money surged from 16% to 26% in one year. There, smaller outfits are gobbling up real estate-owned (REO) properties, “driving down distressed inventories and leading to notable increases in REO prices that have in turn led to larger market upticks,” as Brennan explained.
“If they keep doing this, and prices continue to go up, [then] the huge shadow inventory is going to begin to come in, dampening prices,” Feder noted. “And unlike homeowners, [institutional money] will move around if they find a better opportunity,” he said, adding “some of the forces driving the housing market aren’t sustainable.”
Having been the epicenter of a financial crisis that brought the global economy to its knees, the U.S. housing market has come back incredibly from the depths of the abyss. The latest Case-Shiller numbers show home prices have risen more than 10% in the 12-months to March, while homebuilders like KB Home,
This has prompted huge investor interest in the housing market, which is slowly spilling over to the general public. Hedge funds trading mortgages made killer returns in 2012 as the housing recovery took off, Warren Buffett said he’s excited, Blackstone has been buying thousands of homes, even Bank of America is jumping in on the game, and the little guys are trying to get a piece of the action too.
The problem now is that, while the tide won’t turn per se, there are indications that home prices may begin to face obstacles in their path to recovery. In other words, as supplies tighten and the shadow inventory begins to enter the market, distressed properties and other devalued homes will limit appreciation. Those betting on a sustained recovery may lose their shirt as housing markets hit turbulence and begin to move up and down. And everybody knows how good traders, as opposed to buyers who are looking to live in these properties, are good at keeping up with volatility.
A housing recovery is under way, there's no doubt about that. Boosted by the Federal Reserve’s unprecedented monetary easing and a market that had been severely depressed, prices are going up and people are once again looking at buying their own homes. New investors should be wary, though, of jumping in head first, as housing markets are highly localized and dependent on several uncertain factors including government regulation, banks offloading their REO portfolios, and institutional money; those that were already in should be aware of the risks. In layman's terms, the short-term money now dominates the market. Homebuyers have been warned.
