Investors fuel U.S. housing recovery

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(Moneywatch) Even as U.S. economic growth stutters, the housing market is showing real signs of a rebound: home prices are up, pending sales and constructing activity is rising, and the number of existing homes for sale continues to drop. The big question, amid slow job growth and stagnant personal income: Will it last?

If the housing upswing does continue, it will likely because of the trend's unique characteristics, with investors, more than consumers, sustaining momentum.

The indicators of a housing recovery are both plentiful and nationwide. According to the most recent Fiserv Case-Shiller data, the real estate market during the spring and summer this year was the strongest since the peak of the housing bubble in 2006. Other green shoots for housing:

Despite the positive signals, analysts are tempering their enthusiasm, nothing that the recovery in housing is only relative to the calamity that befell the real estate sector during the financial crisis.

"Yes, the housing market is in a recovery," says Rick Sharga, executive vice president of Carrington Mortgage Holdings, a loan servicing firm. "All the metrics are pointing in the right direction -- pending sales, sales of new and existing homes, price appreciation, and housing starts. Delinquency and foreclosure rates are both trending down. But it's not an explosive, booming recovery. It's a recovery in the sense that it's better than the horrible numbers we've seen over the past few years."

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What makes the upturn in housing unusual is that it is mostly being fueled not by consumers buying a first or even a second home, but by investors scooping up distressed properties. This is one result of the Federal Reserve keeping its prime interest rate so low. That drives down the cost of mortgages, but also makes it harder to get a good return on things like savings accounts and traditional investments like bonds. So hedge funds, private equity firms and other investors looking for a better return on their capital have moved aggressively this year to buy single- and multi-family homes.

"I am not seeing an increase in buyers," says Mike Orr, director of the Center for Real Estate Theory and Practice at Arizona State University's Carey School of Business. "I am seeing a reduction in supply as the primary cause of the recovery. Investors represent about one-third of buyers, owner-occupiers and second-home buyers are the other two-thirds. They are all competing for a smaller pool of homes for sale. In particular the pool of bargain bank-owned or short-sale homes is much smaller than last year."

Investors differ from ordinary home buyers in two notable ways: They can pay cash for properties and they buy in bulk. This is a major reason for the slowly rising home prices and diminishing housing stock.

"It's clear that the bulk sales to investors have reduced the property overhang in for-sale property, which is a positive," says Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. "It's helped in absorbing that inventory, which has helped stabilize the market. It's obviously put a floor under prices."

Investors are also behind much of the new home construction because they are providing funds to regional homebuilders, which continue to have difficulty getting loans from banks. In both cases, they expect to earn income by renting the houses over the next five to seven years -- when they assume prices will be much higher -- and then to sell them when the housing market is strong. 

"We've got an environment where the availability of mortgages has never been tighter," says Rob Simmons, former chief financial officer of online brokerage E-Trade Financial. "This is creating opportunity for investors to come into market and provide a bridge until the jobs market and other things improve enough so that individual buyers can start buying again."

While the flood of investor money into housing has helped boost residential real estate across the nation, some people worry about the impact of so many absentee landlords in local markets.

Such investors "are not familiar with values, often do not view the property, and have little experience in the repair costs and management costs in the local market," says Bruce Ailion of RE/MAX Greater Atlanta. "In my market, private equity and hedge funds are driving up prices."

Yet given how far home prices have fallen since the bust -- roughly 30 percent from their 2006 peak -- few expect those costs to be the main barrier to sales anytime soon. For now, tightness in the credit markets remains the chief constraint on sales and prices, as lenders tighten standards for borrowers.

[GaryNelsonSmith]

So - Let's address what happens to these homes 3-5 years from now? Will they be "dumped" for a better performing "portfolio" product?

[get_down]

You know what? When your county evaluates your home to a higher price, then they'll collect more property tax from you - the home-owners. Never the less, even when the home price goes up, I will not have the "wealth effect" as that Federal Reserve Chairman Ben Bernanke calls it - i.e. I will not feel wealthier, and I am not going to spend more!

[csparish1956]

Figures. The people preying on the unconscionable losses of others, are making the big profits. Go capitalism.....

[stopkillingourwilderness]

yup. thanks to corrupt banks, the middle class can't buy any of the properties, can't sit on them (either living in them or renting them out) to enjoy the inevitable appreciation, then can't sell them for a profit and move up.

people don't seem to understand that this one, single dynamic of homebuying-appreciation-profit has created the majority of wealth for working and middle class people over the past 75 years, and now those doors are slamming shut in favor of the 1% hogging all that wealth accumulation. this will have dramatic, very negative consequences for all of society as those in the middle of the pyramid scheme have to tread water faster and faster just to stay afloat and have literally no chance of rising upwards at all.

disgusting.

[Tarzan98]

Which Hedge Funds are buying houses. I've got a couple I'd like to sell them.