By Nick Timiraos
Wall Street Journal, April 2, 2013
Home prices have been zooming up over the past year in many of the housing markets that saw the biggest declines. Recently, some pundits have grown wary of the rally, arguing that it’s unsupported by fundamentals and marks the beginning of another housing bubble.
Housing is recovering due to the extremely low supply of homes for sale. Demand, meanwhile, is up amid strong appetite from investors and from extremely favorable affordability conditions thanks to record-low interest rates.
The upshot is that the recovery is unfolding faster than it would due to low inventory, low interest rates, and investors. But does that make for another bubble? Ivy Zelman and John Burns, two housing analysts that were among the first to call the bottom last year, highlighted three misunderstood concerns about the housing market:
Myth #1: Housing would crumble if the private equity-backed investors stopped buying.
Large private-equity backed investors have made a splash by purchasing thousands of homes that can be rented out. The largest of these — theBlackstone Group BX +1.93% — has bought around 20,000 homes through February. That’s a lot of homes, but it’s still a fraction of the 5 million homes that sold last year, including around 1 million that sold to investors.
“If all of the big funds went out of business today, we’d still be talking about investors,” says Burns. “They’re mostly mom-and-pop outfits. They’re doctors, local professionals, and they’re probably worried about being in a lot of cash.”
Investors have bought around a third of all foreclosed properties sold by Fannie Mae FNMA +0.12% and Freddie Mac FMCC 0.00% in recent years, according to data tracked by Zelman. Of those investor sales, institutional buyers are no more than 25% of sales. So while large buyers have played critical roles sopping up an overhang of homes and turning around buyer psychology, the “institutional guys are still really small relative to the size of the market,” says Zelman.
A recent report from research firm CoreLogic quantified large-investor purchases by market. It measured the share of home sales by investors that either bought homes under the name of a corporate entity or that bought more than five homes. In Phoenix, these multi-property buyers accounted for 26% of home sales at the end of 2012, up from 16% in 2011. In Atlanta, they were 24% of sales, while in Las Vegas, their share stood at 22%.
The report, however, found that many Western markets that had witnessed huge declines in inventory, such as San Diego and Oakland, Calif., had seen more purchases from individual investors — not institutions.
Myth #2: Institutional investors must be overpaying for homes.
In markets such as Phoenix, where prices in January have increased by 23% from one year ago, there are certainly fewer deals to be had, and it’s possible that some investors are overpaying.
- Bloomberg News
But at a presentation to a few hundred private-equity investors who gathered in midtown Manhattan earlier this year, Zelman explained how professional buyers have been able to buy homes at discounts, even as prices rise, because they are “securing these homes in a more sophisticated way” — often at courthouse auctions before banks ever take back the properties.
To illustrate this, she provided one example using data from an undisclosed, large investor in Phoenix. This investor acquired properties for $75 per square foot in December, up from $69 in September, a nearly 9% increase. By comparison, the asking price of foreclosed homes was $92 per square foot and new homes were listed for $117 a square foot.
“The people who say the trade is over, I don’t think they truly understand the replacement-cost analysis,” said Zelman. Ultimately, higher prices and lower returns will dampen investor interest in housing, but it’s not clear that will happen this year.
Myth #3: There’s a massive shadow inventory of bank-owned homes that will hit the market, scotching any recovery.
The numbers don’t look good. There are around 4.9 million loans that are either in the foreclosure process or that aren’t making their payments, according to analysts at Morgan Stanley — more than double the normal level of “shadow inventory” of potential distressed sales.
But this is still down 44% from a peak of 8.9 million three years ago, according to Morgan Stanley. Moreover, it’s become clear over the past year that as long as inventories of for-sale homes are low, these homes don’t pose the threat to housing markets that analysts once feared they would. Banks have become more effective at modifying loans or approving short sales, where properties are sold at a loss to the lender before they reach foreclosure.
The homes that do run through the foreclosure process are getting purchased by eager buyers, including investors. Two years ago, the big worry in many markets was that there were too many homes and not enough buyers. Today, the worry is that demand is outpacing supply.
“I think people who bring [shadow inventory] up at this point should be completely discredited, for no other reason than you have all of these investors who will buy it up,” said Burns. “How can you complain about the lack of inventory and shadow inventory in the same breath?”