Wall St abandons US housing

Wolf Richter cross-posted from Naked Capitalism.

In real estate, national averages paper over the gritty details on the ground and are a crummy, often contradictory indicator as to what is happening in specific metro areas. When a new trend starts or when a reversal takes place in some locations, it’s watered down by data from other unaffected locations to form the overall averages. But even with this caveat, a national average suddenly sounded an alarm for the housing market: the smart money has started to bail out.

The smart money entered the housing market gingerly in 2011 then piled in helter-skelter over the next two years, gobbling up vacant single-family homes out of foreclosure. The forays were funded by Wall Street, awash in the Fed’s crazy-money. The smart-money operators trained their guns on specific markets, such as Phoenix and Las Vegas, and bought homes by the thousands that they tried to rent out. Then they spread their campaigns to other cities.

The tally has reached 200,000 single-family vacant homes for which they’re now trying to find tenants. In the process, mega-landlords have emerged. On top of the heap: Invitation Homes, a unit of private-equity giant Blackstone Group, and American Homes 4 Rent, a highly leveraged REIT that went public last August.

As in the heyday before the financial crisis, their smartest minds are now feverishly at work trying to figure out how to shuffle risks and future losses off to yield-desperate investors who’ve been driven to near-insanity by the Fed’s relentless repression of interest rates. So Blackstone and American Homes 4 Rent have started selling synthetic structured securities that are backed, not by mortgages, like the toxic waste before the financial crisis, but by something even classier,rental payments – based on the rickety hope that these single-family homes will stay rented out. Wall Street is already jubilating: the market for this type of synthetic monster is estimated to be $1.5 trillion [read.... The Exquisitely Reengineered Frankenstein Housing Monster].

But now the party appears to be running out of booze. This frantic institutional buying has driven up home prices – in some areas above the levels of the prior bubble. Trying to make money by buying these homes at inflated prices and renting them out into a tough job market where strung-out consumers with declining real wages have trouble making ends meet has become a precarious business model.

In some of the formerly hottest metro areas, purchases by large institutional investors – those having bought at least 10 properties over the past 12 months – plunged in January from a year ago, according to RealtyTrac’s Residential & Foreclosure Sales Report: in Jacksonville, Florida, by 21%; in Tampa, by 48%; in Tucson, 59%; Memphis, 64%; in Cape Coral-Fort Myers, Florida, by 70%!

Institutional purchases hit the skids in over three-quarters of the 101 metro areas that RealtyTrac analyzed, their share dropping to 5.2% overall, from 7.9% in December, and from 8.2% in January 2013. It was the lowest monthly share since March 2012, at the infancy of this whole bonanza.

US-homes-institutional-investor-purchases_jan-2014-RealtyTrac

But 23 of the 101 metro areas had year-over-year gains, some of them late starters. In Atlanta, institutional purchases rose 9% to where a quarter of all homes were purchased by institutional investors. That’s how the Fed has “fixed” the housing market. In Austin, the institutional share soared by a mind-boggling 162% to reach nearly a fifth of all purchases. In Denver, their share rose 21%, in Dallas 30%.

And in Cincinnati 83%. “Big hedge fund investors,” explained Michael Mahon, Executive Vice President at HER Realtors, which covers the area. “I think that’s contributing to the lower levels of inventory available on the market,” he added, seeing how these vacant homes have been pushed from the much scrutinized for-sale listings to the ignored for-rent listings.

“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said RealtyTrac VP Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”

So forget the by now ubiquitous all-encompassing polar-vortex explanation. Which begs the question: if not institutional investors, who the heck is going to buy these homes at these prices?

Existing homeowners who buy a home and sell their old home don’t count. They’re just swapping homes, not creating demand. But foreigners are buying in certain cities – Chinese and Argentine buyers and others who want to deposit their wealth while they still can in a reasonably safe place. So they’re creating demand.

But the most powerful economic force in the housing market, first-time buyers? Normally, they’d swarm all over these homes and create real and lasting demand and make the housing market grow. But prices have soared, and mortgage rates have crept up, and young people are teetering under piles of student loans, and so that economic force has collapsed to record low levels. Read…. Without Them, The Housing ‘Recovery’ Remains A Sham

7 Responses to “ “Wall St abandons US housing”

  1. Peter Fraser says:

    It was a one off entry into a distressed market. The bargains are gone and they will now retreat.

  2. Pfh007 says:

    The forms of malinvestment generated by manipulated low rates are as exotic, varied and fragile as hot house flowers.

    The malinvestment blooms being cultivated by our RBA’s low interest rate strategy will prove equally exquisite and equally prone to frost bite and early wilting.

    Best to just keep walking as Joe Hockey implores you to make a purchase.

  3. PhilBest says:

    I’m finding it very interesting to try and pick why the different timing of institutional investor interest in different cities.

    Atlanta on the rise now as others are falling?

    I suggest this is because Atlanta was never a PRICE bubble city and there was never the local expectation of gains to the moon. It was an elastic supply city.

    However, because it was the “Community Reinvestment Act” ground zero in the USA, it did end up with mortgage defaults and price FALLS. I think it obvious that the incredibly cheap Atlanta property that is still available now has nowhere to go but up.

    It would be even more a killing fields for speculators if Atlanta’s housing supply has been distorted by urban planning (I don’t know enough about every city’s politics to know) sufficient to turn it into a Phoenix / Las Vegas of appreciation. All I can do is look for evidence after the inflation has occurred. Smart big speculators will be paying experts to keep track of the progress of anti-growth urban planning mania in every city that does not yet have it. The most fiendish big investors will be actively funding the advocacy of it.

  4. Snail Cafe says:

    My Vietnam vet friend lives in Cape Coral and I went over there for a couple of weeks in 2011. He had just purchased a new home in 2010 for about 105k that would have cost him over 275k in 2007. He has 1 neighbour directly behind him but the rest was vacant lots apart from a few homes here and there. Back then he said that the vacant lots could be had for 3-5k (average 700sq good size fully serviced).
    I spoke with him on Skype a few weeks ago and yes he said prices have gone up a little but demand was still weak as the job market is crap , his view is that the ordinary American is very cautious as they are still smarting from the GFC but the Wall St rock spiders are trying to drum up business for themselves with their sales pitches on TV and holding get rich seminars…as the article above says ” the party appears to be running out of booze” but maybe it was a BYO bash and the Wall Street freeloaders got pissed too early in the party.

  5. geoffw says:

    It was pretty obvious that distressed property in some cities were genuinely good value in 2011/2012. I think the level and movement in unemployment has been a big driver in various cities, in addition to the effect of institutional buyers in some cities and the availability of credit.
    Watch out for cities where unemployment hasn’t come down to a workable level, like Vegas.
    Stick with the cities that have thriving economies and still reasonably priced property – Austin (unemployment rate 4.2%), Houston, Dallas for example.
    Disclosure: I have property interests in the US.