Housing Prices Are Being Dangerously Distorted by Big Institutional Money

Thought you’d enjoy this article which brings a different light to the situation…
and which complements this other article from a few days ago

Tuesday, June 4, 2013, by Chris Martenson

The airwaves are full of stories of economic recovery. One trumpeted recently has been the rapid recovery in housing, at least as measured in prices.

The problem is, a good portion of the rebound in house prices in many markets has less to do with renewed optimism, new jobs, and rising wages, and more to do with big money investors fueled by the ultra-cheap money policies of the Fed.

On my recent trip to Salt Lake City, Utah, after presenting to a bi-partisan audience in the Capitol building, a gentleman came up to me and introduced himself as a real estate agent.  He explained that he’d been seeing something very strange over the past six months, where very well capitalized, out-of-state private equity funds had been buying up huge swaths of residential real estate with cash. He wanted to know if I knew anything about this.

Of course I had been tracking this phenomenon for a while. But I had not been aware that Salt Lake City had been one of the targets, so I asked him how the deals worked there.  Apparently, the hedge funds make “full ask” price offers, sight unseen and without conditions (such as inspections and the like), for whole baskets of available properties, typically in the middle to lower price ranges.

The effect, not surprisingly, is that regular home buyers are being outbid and eventually priced out of the market.  Over time, these full cash offers at the ask get noticed and home sellers begin to raise their asking prices. For a young family saving to obtain the required 20% down, a 10% hike in price on a median house translates into an additional $3k – $4k that they must have to set aside to make the deal work (assuming they’ve not just been priced out of the house they wanted to buy).

The impact, he told me, is that a growing number of young families are finding themselves unable to obtain their first home.

They can thank Ben Bernanke for this.  Here’s why.

The Back Story

The housing propaganda machine has been turned on in full force, as exemplified by this article in the Wall Street Journal that headlined the front page:

Home Sales Power Optimism

May 28, 2013

Home prices surged during the first quarter at their fastest pace in nearly seven years, the latest sign of a sustained warm-up in an economic recovery that has otherwise been marked by starts and stops.

The housing-market revival—and an accompanying report on consumer confidence—adds new grist for a debate inside the Federal Reserve about how far to push its easy-money policies, including an $85 billion-a-month bond-buying program which has helped to keep mortgage rates near historic lows, boosted asset prices and begun to stimulate hiring and spending.

Over the past year, the share of foreclosed property sales has fallen, particularly in California cities, Las Vegas, and Phoenix, which have posted the largest year-on-year price growth

The latest reports were big factors driving financial markets Tuesday. Stock investors, encouraged by the strong data, sent the Dow Jones Industrial Average to a new high.

There you have it.  The rising house prices are being presented as  a signal of a “sustained economic recovery” that feeds into consumer confidence and as reason to propel the stock market to new all-time highs.  What’s not to like in that narrative?

However, if you value context, the above article will leave you disappointed because it omits the main driver of house price gains in the areas mentioned: big, institutional money seeking rental income and future capital gains.

As the article noted:

Many of the largest home-price gains have come in the West, including many markets hit hardest by the foreclosure crisis.

In March, prices were up by 22.5% in Phoenix from one year earlier, and by 22.2% in San Francisco. Other cities with double-digit gains included Las Vegas (20.6%); Atlanta (19.1%); Detroit (18.5%); Los Angeles (16.6%); Portland, Ore. (12.8%); Minneapolis (12.5%); San Diego (12.1%); Tampa, Fla. (11.8%); Miami (10.7%); and Seattle (10.6%).

The fact that big funds with big money have been very aggressive cash buyers in the formerly hardest-hit markets is very well documented and has been for well over a year.  How such important context gets left entirely out of an article about house-price appreciation in exactly those same markets is something of a mystery, at least from the standpoint of honest journalism. Here’s just one… Read more…

This entry was posted in 2012, Financing, Investing, Market outlook, Single-Family Homes and tagged , , . Bookmark the permalink.

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