The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.
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.
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.
Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough....
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. That is helping to shore up prices and create confidence in the broader markets.
“When people write the story of this housing recovery, these investors will be seen to have helped put the floor under the housing market,” said David Bragg, an analyst at Green Street Advisors. “In some of the key markets, that contributed to the recovery.”...
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.
Fitch Ratings warned last Tuesday that prices for single-family homes in the regions with the biggest housing rebounds had been outpacing the growth rate in the local economies and “could stall or possibly reverse” if big investors start selling.
“We see economies that continue to struggle — we don’t see them recovering enough to justify this drastic increase in prices,” said Ms. Mistretta at Fitch...
To the extent that the housing rebound is becoming overheated in some pockets, it does not carry the most significant risks of the real estate boom that came crashing down in 2008. The new investment groups are not heavily indebted, making them less vulnerable to small movements in real estate values, and the risks are not spread as widely through the financial system....
Nearly all of the big investors have insisted that they plan to rent the houses they are buying for years to come. The Blackstone unit, Invitation Homes, has opened 14 offices across the country to serve the homes it has bought, a spokesman for the firm said.
At American Residential Properties, which went public in May, the chief executive, Stephen G. Schmitz, said that if other firms start selling their houses, “we’ll step up our buying.”
He added: “We still think that we’re in a buyer’s market.”
Yet 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.
All of this has made it hard for house hunters like Jeff Martin, who is looking to buy a fixer-upper in Riverside County. Mr. Martin, 58, has made offers on 15 houses over the last year. Last Wednesday, he received his latest rejection. On most of the houses, Mr. Martin has lost out to investors offering all cash.
Mr. Martin, a retired Navy veteran, puts much of the blame on banks that have been holding onto empty houses, lowering the supply of available homes. He said he has trouble faulting the investors, given that he was involved in real estate financing during the last boom. But he is worried that if mortgage rates begin to rise he will lose out on his opportunity to buy. Rising mortgage rates could also lead to a broader slowdown in the real estate recovery.
Mr. Cusumano said that the investors he works for have been trimming back their purchases in the area. His agency closed on three houses for investors in May, down from eight in February.
But the fevered pitch of the market has not died down.
2---Fed tapering sends shares plunging, Bloomberg
“We definitely think that equities are going to be more volatile with all the talk of Fed tapering,” David Lafferty, a Boston-based investment strategist at Natixis Global Asset Management, which manages about $785 billion, said in a phone interview. “You can see that volatility in the market jitteriness in the past days. Add to that, that in this slow growth environment, you tend to have more hiccups that you would otherwise have if you were in strong growth phase
3---Paul Krugman and the Fatherless Keynesians, naked capitalism
The natural rate of interest is the interest rate at which the economy reaches full employment without generating substantial inflation. Any interest rate lower than the natural rate would lead to inflation as individuals spent and invested too much money because of the cheapness of borrowing; while any rate higher than the natural rate would generate unemployment as individuals spent and invested too little money because borrowing rates were too expensive. The idea lying behind this is that in order to bring the economy to a low-inflation level of full employment all the central bank has to do is set the interest rate at the level at which the supply and demand for savings generates a sustainable quasi-equilibrium result.
Yes, the whole idea is essentially based on the classic supply and demand graph – only applied to savings and investment rather than, say, the demand for apples or bananas at any given price.
Neoclassicals find it remarkably difficult to think outside such a framework because it has been drummed into them since day one. Indeed, one would not be exaggerating too much by saying that neoclassical economics – and consequently, Bastard Keynesianism, which is an offshoot – is just a great big pile of crude supply and demand graphs piled one on top of the other. The idea of a natural rate of interest is simply the supply and demand graph being applied to the economy at large.
The supposed fact that a natural rate of interest exists leads many neoclassicals to assert that central banks have full control over the level of economic output in an economy at any given point in time. This, in turn, leads many neoclassicals to assert that other policies, like government expenditure programs (stimulus packages), are completely ineffective and only generate inflation. After all, if central banks can set the interest rate in line with the natural rate to generate Economic Bliss then why on earth would we need the government to intervene at all? Looked at in this way, the argument in favour of a natural rate of interest can be interpreted as a strong case against any macroeconomic stabilisation policies that involve the government in any meaningful way
4---El-Erian: Central Banks "Have Materially Damaged Their Standing", zero hedge
Central bankers are basically hoping that financial-market hype by itself can help pull fundamentals higher. The idea is that price action will trigger both the “wealth effect” and “animal spirits,” thus inducing consumers to spend more and companies to invest in future capacity.
Count me among those who worry about this situation. Far from a world of optimal policy, central bankers have been forced into prolonged reliance on imperfect approaches. From my professional vantage point, I sense a mounting risk of collateral damage and unintended consequences.
Market signals are more distorted, fueling resource misallocations. Investors are piling on more risk at increasingly elevated prices. Fundamentals-based investing is giving way to a frantic search for relative bargains in an increasingly overpriced financial world.
All this will not matter much if central banks live up to their reputation as responsible and powerful institutions that deliver on their economic promises. But if they do not – essentially because they are not getting the required support from politicians and other policymakers – then the downside will involve more than just disappointed outcomes. They will have materially damaged their standing and, consequently, the future effectiveness of their policy stance
5--Are Consumers, Businesses Expecting Lower Prices?, WSJ
6--Government spending on construction is tumbling. Public construction spending dropped 1.2% in April to its lowest level since 2006, extending a 5.7% drop since October. The $85 billion in across-the-board federal spending cuts known as the sequester are taking a toll on building at a time when many local governments are still struggling with tight budgets and a tepid economy.
7---Some Markets Showing Addiction to Cheap Money, Fed’s George Warns, WSJ
8--Corporate revenues falls, prag cap
9--The food stamp fight, CEPR