Housing Market Shifting Into Dangerous Equilibrium
Existing-home sales rose slightly in July, and while the numbers are still at a historical low, this has spurred a new round of optimism over the housing market. At the same time, the fragility of the market can be seen in the report by the National Association of Realtors that applications for home mortgages fell for the third straight week as interest rates on 30-year loans rose. In other words, the refinancing and mortgage purchasing boom is tied almost directly to the cheap interest rates, such that when they rise, demand falls. The government’s new HARP guidelines and other incentives really don’t make a difference.
Nevertheless, the round of optimism continues unabated. With a better housing market, states that had a lot of housing trouble are seeing their job markets come back strong. Prices have stabilized and are poised to turn positive. More homes are selling, at least for now.
Considering the inadequacy of housing statistics, it’s hard to say exactly what is going on (More informed speculation from Michael Olenick). However, we do know some things that have led to this optimism. First, artificially constrained supply. I wouldn’t be as credulous as Housing Wire in saying that nearly half of Fannie Mae’s REO (housing inventory held post-foreclosure) is “unable” to get to market; it’s more like “unwilling.” And we see this across the board. The constrained supply has pushed up prices as homebuyers bid on fewer homes. Since this is working for the GSEs and the banks, it’s unclear if that shadow REO will ever reach the market again. This has a major impact, as these houses still exist in the physical world. There’s a strong suspicion that a fetid pool in a foreclosed home in Studio City, California generated the conditions for West Nile virus to spread. That’s just one example. Blight generates crime, disease, and overall, it has a significant impact on communities.
The other big issue in the housing space right now is that private equity firms, hedge funds and other institutional investors have gotten into the market for homes in a big way. They are buying up large blocks of inventory and renting them out, turning the US into, as Yves Smith calls it, a “rentcropper society.”
Fannie and Freddie are now piloting programs for bulk sales of foreclosed home. Historically, they’ve sold them individually or in geographically dispersed packages, but since February, Fannie has been experimenting with selling homes in large volumes in Phoenix, Atlanta, Chicago, Florida, Los Angeles and Las Vegas. There are also reports of investors making significant buys in Florida. Bank of America is also experimenting with bulk sales. It’s likely that once the Fannie and Freddie programs are up and running, the servicers will copy their template with private label loans.
While the bulk sales programs allows not for profits and government bodies to participate, the main target is private equity investors. And the expectation is that fortunes will be made. As one prospective buyer said, “If the government is selling, I want to be on the other side of that trade.” Major PE firms are raising multi-billion dollar funds dedicated to this opportunity.
There are several grounds for concern. One is that there is no model for large-scale, absentee landlords of single family homes. In the past, institutional investment in residential rental has been in multifamily properties, often apartment buildings. And these almost without exception had property management in place at the time of acquisition or was in dense urban areas where it was easy to find experienced management firms. And even in locales where those services are available, PE firms have too often proven to be bad landlords by design.
Smith goes on to look at a few particularly egregious examples.
I actually think the decline of homeownership could be a net positive over time, in that the percentages pulling back on buying houses probably shouldn’t have extended in the first place, and that there’s more stability for society in renting. However, I don’t think you can look at a situation with massive amounts of properties deliberately held off the market, as well as others in the hands of absentee slumlords from the private equity industry, and think that it’s at all a healthy scenario.