Over the last two years I’ve blogged here American housing and interest rate policy has been a big focus. I’ve written (incorrectly) about how I thought the Fed wouldn’t raise rates until 2012 because of rate resets. I’ve written about the price to rent ratio, and why I think housing is tremendously undervalued.
I’ve written about the economics of local real estate and what factors affect local housing prices. Or about how housing bubbles could be completely avoided if people weren’t irrational and were willing to consider the relative difference between rental prices and purchasing prices. I’ve said some controversial things, too, like how I think retail and commercial property in high cost areas will be converted to residential property, potentially crushing some local market premiums.
Most recently, I covered a survey that showed more Americans wanted to buy a house in the next 6 months than ever before.
And most importantly, I’ve written about how we all work for the housing sector as 75% of all economic growth in the 2000s had to do with housing and home equity withdrawals. The housing sector literally drives the American economy.
So, I really like housing. I’m going to keep talking about it, too.
Why Housing is Officially Recovering
The housing collapse happened for two reasons. First, short-lived demand from a credit explosion pushed prices well over and beyond the cost of replacement and the historical price to rent ratio. In short, homes were overvalued due to a short term burst in demand vastly outstripping then current supplies.
Secondly, the housing collapse happened because banks were overlevered and incapable of continuing the lending velocity necessary to sustain fairytale level prices.
That said, I think the down cycle is now over for good, and here’s why:
- Homes are vastly cheaper to purchase than they are to rent, and any rational person would rather own a home for less money per month than they could rent one.
- Homes are selling for under replacement value in many parts of the United States, which means new supplies will be constrained until prices rise past equilibrium.
- Employment and consumer confidence are improving. Additionally, previously unemployed Americans are crossing the arbitrary 2 years of employment necessary to get a loan.
- HGTV is talking about real estate more and more. (Seriously.)
- Big investors are backing up the truck because the spread between gross rental yields and carrying costs are ridiculously high.
- Shadow inventory literally does not exist. It exists only in markets where living conditions are terrible and I’m not convinced national statistics are of any value. Detroit isn’t St. Louis, or Little Rock, or Elkhart Indiana.
Just to show how affordable homes are, and why it’s #1 in my list, I have this chart from BlackRock:
Buying is cheaper than renting in 50% of metro areas as of early 2012, when rates were higher than they are right now. Houses are super cheap, yo!
Who’s Buying Homes?
Besides average Americans, investors are also snapping up homes at an impressive pace. Local individual investors see value in American real estate, but so do insitutional investors like hedge funds and asset management firms.
I learned recently from an article that Blackstone has acquired $2.25 billion in single family homes in just the last six months. Blackstone is a major private equity player and huge asset management company. As of July 2012 it had made $250 million in purchases. As of January 2013, it’s up to to $2.5 billion, which it spent to acquire more than 16,000 single family homes it intends to rent.
This is big news. Investors are willing to put a price floor in the market based on the spread between rental yields and the cost of capital. That provides huge support for the housing market, and it also means that if yields get bid down, prices get bid WAY up.
Front-Running of Epic Proportions
I think there’s a lot of money to be made in front-running future single-family home buyers, as I wrote about at Investor Junkie. See, if you buy real estate right now with someone else’s money, you can snap it up at a bargain price before everyone else gets approved from the bank to make the same deal.
The market for real estate is thin (people or institutions who are well financed) yet the supply of housing is huge. It won’t be that way forever…average (non-PF blog reading, budget busting people) will be back in the market soon enough. I liken this market to my favorite kind of setup in the stock market that happens when dividend paying companies stop paying dividends. Dividend investors leave, a thin market emerges, and bargains are found. The same idea is playing out right now in housing.
So why not front run them like Blackstone is doing? You have a competitive advantage in buying now if you can do so, one which should give you economic profits as ordinary buyers return at a later date.
If you can, go for it. Really, if I were in a lifestyle/financial/out of stock ideas position to lever up on real estate to buy and hold I’d be all over it in the cash flow positive Midwest where I live. In the meantime, I’ll have to be happy to be invested in Ford (which has extreme exposure to credit availability/housing), and a microcap company that buys/flips/holds real estate…I won’t be sharing the ticker any time soon (I’m buying).
All this said, I think housing has found a bottom. I know that’s a very, very dangerous thing to say given how hard it is to call a bottom, but I really think the only way to go for the next several years is up, up, and away.
Viva la bubble and Bernanke’s boom. I pity the fool who thinks this time is different.