Who's really fueling the rebound? It's one of the housing recovery's questions du jour. It's answer is important, for it may contain information on how long this uptick may last, and how far the current mojo in the market will take home builders.
So, again, who's fueling the rebound. Door No. 1: Is it the vaunted "pent-up demand" marketplace of people who'd double-upped their way through the latter part of the last decade, now streaming at last into household formations buying houses as owner-occupiers?
Or--Door No. 2--is it institutional investors? They're in a yield-thirsty fever, with cash to burn, investment to place, and few places to turn. Suddenly, Fed-eased interest rates, other policy accommodations, and profound and pervasive real estate distress plopped on their platter, and they were off to the races about 18 months ago, scarfing up single-family REO and distressed deals as fast as the paperwork could get done. Instantly, their business model had a proof-of-concept: buy-low, cash-flow, and exit. Simple, provided one times everything, um, perfectly.
So, today there's a debate, and a piece in the Washington Post yesterday by Michael A. Fletcher limbed out some of its subplots. Fletcher practically asserted that institutional players are housing's wolves-in-sheeps' clothing. Here's the clincher passage:
Real estate executives say institutional investors — who in some cases are bidding on hundreds of homes a day — account for as much as 70 percent of sales in some Florida markets. Over the past two years, analysts say, they also have accounted for a majority of purchases in other parts of the country where housing prices are rebounding sharply.
A Wall Street Journal piece from Tom Gara yesterday chimed in with analysis on the bully-like role of institutional players. Not only are they hogging bigger and bigger chunks of an already constrained supply of for-sale inventory, Gara notes, they're also forcing up prices, which in turn makes it more difficult for individual would-be owner occupiers to ante up at the level they need to to land a property.
At the same time, Gara acknowledges that investors have been a positive force as well. They've absorbed an avalanche of distressed residential inventory about as fast as the bacteria got rid of the gulf oil disaster three years ago, and they've been improving properties as they've sought to turn into residential real estate's latest phenomenon, a viable scattered-property single-family for-rent model.
The model seems to fit the times. You-and-me kind of people have less rein financially, and may need to rent deeper into our late-20s and early-30s. Which doesn't mean we don't want the benefits--schools and communities--that single-family suburban communities offer.
Calculated Risk's Bill McBride, who tends to team up with housing economist Thomas Lawler on such issues, offers clarity on the issue of investors vs. owner occupiers. He gives a nod to the ill-effects on individual buyers of powerful institutional investor players thrashing through a supply-constrained market. Still, he says the near-term harm to the housing market won't be extensive, particularly as the owner occupier mojo takes on a life of its own.
Down the road, when the cycle is supposed to pour more demand into the move-up and second move-up segments, the single-family rental phenomenon that's playing out now may throw a wrench into the cycle's works. Read More