Why Its a Fake Housing Market Recovery

The U.S. housing market is becoming a main topic again in the mainstream media these days. I keep reading about how rising home prices will now get the U.S. economy going again.

The National Association of Realtors (NAR) expects average existing home prices in 2013 to be around $185,800, with an increase to $193,600 by the end of 2014. (Source: National Association of Realtors, January 2013.)

But what’s fueling the soft rebound in the U.S. housing market and home prices is something that’s never happened in our history. It’s not individuals buying houses who are moving prices and demand higher; it’s institutions. Yes, big institutional investors are buying houses—and in a big way!

The Blackstone Group L.P. (NYSE/BX) bought $2.5 billion worth of U.S. homes—that’s 16,000 units in total so far, with cash! In October of 2012, the company owned $1.5 billion worth of homes and was spending $100 million a week to purchase more! (Source: Bloomberg, January 9, 2013.)

Other companies like the Colony Capital LLC and Waypoint Homes are taking similar courses of action as the home prices increase. Colony Capital has already purchased 5,500 homes since April of 2012 and expects its investments to increase to $1.5 billion by the end of this year. Waypoint Homes has bought 2,500 home and plans to have a total of 10,000 homes by the end of 2013.

Institutions are pouring big money into buying individual homes, fixing them up, and then turning around and renting them. And more and more companies are entering this new “game.” As an example, Silver Bay Realty Trust Corp. (NYSE/SBY) raised $245 million in an initial public offering (IPO), and it plans to get involved in the markets for single-family homes.

With that said, the U.S. housing market isn’t seeing any real recovery—a recovery that we can look at and say it will help the economy. Let’s face it; as soon as institutional investors can get better returns for their money elsewhere, they will be out of housing and moving on to the next thing. Home prices increasing may have been great for speculators and investors, but not for the economy.

Dear reader, the U.S. housing market is missing the most important element: first-time homebuyers. Currently, home prices are rising because institutions are rushing in to buy. The returns investors can get elsewhere are miniscule, so they are moving into rental housing.

First-time homebuyers accounted for 30% of the existing home sales in November of 2012 and 35% in November 2011. (Source: National Association of Realtors, December 20, 2012.) The number of first-time homebuyers in this market is declining—not what you’ll see in a true housing rebound.

Michael’s Personal Notes:

It’s Sir John Templeton, a famous investment pioneer, who said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” (Source: Sir John Templeton.org, last accessed January 10, 2013.)

Templeton’s quote reminds me of the stock market today. We’re still seeing a rally in the S&P 500 index (while the Dow Jones Industrial Average is stagnant). As the S&P 500 rallies and key stock indices break above their previous highs, I become more skeptical about future returns from stocks.

I see a wave of optimism pouring into the stock markets. Stock advisors and investors alike are turning optimistic about the outlook of key stock

Dear reader, if there is one thing you take away from my commentaries each day, I hope it is this: the general consensus, what the majority of people believe, usually doesn’t happen. indices—meanwhile, nothing has really changed in the U.S. economy or elsewhere in the global economy.

In the fall of 2007, when key stock indices were at record highs, we heard calls for the stock market to go much higher. But it collapsed instead.