Thousands of smaller investors have piled into the game. And so have the giants.
Blackstone Group LP, the worldâ€™s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg, to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work.
Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami.
It had an impact. In the latest Case-Shiller reportâ€”a three-month moving average for October, November, and Decemberâ€”home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble. Las Vegas popped 12.9%, and Phoenix 23%.
Itâ€™s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%.
â€œWe recognized that prices were moving faster than people expected,â€ explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, theyâ€™re still â€œfinding opportunities to buy.â€ They might not be able to rent them out very quickly, but theyâ€™d rather not be â€œmissing out on a few points in home price appreciation.â€ The race to buy is on. The next housing bubble is inflating.
And thatâ€™s great. Moneyâ€”which the Fed hands to its cronies at the frenetic pace of $85 billion a monthâ€”magically finds places to go and drives up values, and transactions take place, and paper gets shuffled around, and homes change hands as banks get out from under them, and fees and commissions change hands too. It inflates GDP, which is what everyone wants. And Chairman Bernanke can contort his arm slapping himself on the back.
Trying to rent these places is another story. Housing is zero-sum: when you move into a new place, you move out of the old place at the same time. So it becomes available. And someone else goes through the same process. Only household formation solves the problem of vacant homesâ€”but that takes years or decades.
Best of all, these formerly foreclosed homes have now been pulled off the for-sale inventory list. Hence the â€œtightâ€ inventory. And theyâ€™ve been transferred to the for-rent inventory list where they donâ€™t bother anyone. Except the owners. Colony Capital, for example, with its 7,000 homes, has an occupancy rate of 53%.
Suddenly, the market for single-family rental homesâ€”unlike apartments, which cater to different peopleâ€”has turned into an elbow-to-elbow affair. The pressure on rents is huge. Year-over-year, rents edged up only 0.5% in Atlanta and dropped 1.7% in Las Vegas. For Phoenix, Bloomberg cited Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency: median rent per square foot rose 3% year-over-year in February 2011, and 1.5% in February 2012. But in February 2013, it fell 3%.
This tendency was confirmed by others. On the west side of Phoenix, where investors have concentrated their purchases of single-family homes, rents dropped by $100 a month last yearâ€”a stunning 10%!â€”according to James Breitenstein, CEO of Landsmith which has dumped most of its Phoenix properties. He is seeing similar pressures in Las Vegas and Atlanta. â€œThereâ€™s a whole bunch of rental supply thatâ€™s coming on that used to be sitting empty in bank portfolios,â€ he said.
Timing couldnâ€™t be worse. Occupancy rates of single-family rental homes are already lowâ€” 53% for Colony Capital. But investors are buying ever more properties and flood the rental market with them. Just when the stream of people whoâ€™ve gotten kicked out of their foreclosed homes is tapering off. With rising costs and declining revenues, the rental part of the business model collapses.
As the Fedâ€™s money is trying to find a place to go, prices may continue to rise. But with the economics to support these pricesâ€”namely rental revenuesâ€”giving way, the remaining reason to buy would be a singular hope: economically unsustainable price appreciation. The definition of a bubble. At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again.
Dallas Fed President Richard Fisher often warned about the nefarious effects of this flood of money. But he was shuffled off to â€œan out-of-the-way ballroomâ€ at the CPAC, where Republicans struggled with the future, and drew barely two dozen people; yet he had a pungent message.