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Wednesday
May292013

Housing Bubble II: Institutional Investors Instead Of First-Time Buyers

Contributed by Michael Lombardi, MBA for Profit Confidential

It’s almost as if the mainstream media is defining the U.S. housing market as being “hot,” while some economists are calling for robust growth ahead. But the reality is that we are far from a recovery in the housing market and more troubles could follow.

As I have discussed in these pages many times before, institutional investors are running to buy homes for rental income, because the yields elsewhere are getting thinner. As a result, we’ve experienced hikes in home prices in the U.S. housing market.

Institutional investors rushed to buy homes with the philosophy of buy cheap, renovate, and rent. But they might be in for a surprise. According to real estate research firm Trulia Inc., since 2005, there have been almost four million single-family homes added to the rental market. That supply has met the demand created during the crisis in the housing market. (Source: Trulia Inc., April 4, 2013.)

As a result, the rental rates that institutional investors were banking on are actually compressing. Take a look at the table below, which depicts the year-over-year change in rental rates and home prices in some major cities in the U.S. economy.

 

U.S. City

Year-over-Year % change in rental rates for single-family homes

Year-over-Year % change in single-family home prices

Las Vegas, NV

-1.9%

24.6%

Fort Lauderdale, FL

-1.2%

10.7%

Chicago, IL

-1.2%

3.6%

Orange County, CA

-0.7%

13.7%

Washington, DC

-0.7%

6.2%

As institutional investors are paying more for homes, their rental income is getting softer.

And the fact of the matter is that we are missing the most important piece of the puzzle for a real housing market recovery—first-time home buyers. Existing-home sales reported by the National Association of Realtors (NAR) showed that in April, first-time home buyers accounted for only 29% of the purchases in the housing market—a decline of more than 17% from April of 2012, when first-time home buyers accounted for 35% of all the existing-home sales. (Source: National Association of Realtors, May 22, 2013.)

And there are other troubling issues in the housing market; more than a quarter of all homes with a mortgage in the U.S. housing market had negative equity in the first quarter of 2013, while 18.2% of homeowners didn’t have enough equity to be able to cover the related costs of selling or moving into another home. (Source: Zillow, May 23, 2013.)

All of this is just simply adding to my skepticism toward the housing market recovery. At the very best, the U.S. housing market is still very anemic. Contributed by Michael Lombardi for Profit Confidential.

Wolf here: The good old days are back, when money grew on trees. Home prices jumped nationwide. The usual suspects: Phoenix soared 22.5%, San Francisco 22.2%, Las Vegas 20.6%. You can’t lose money in real estate. I’m already hearing it again. Here is my take.... US Housing Bubble II: Euphoria And Other Shenanigans

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