During the downturn and early stages of recovery, we were huge proponents of investors taking advantage of overcorrected home prices to make great investments while also helping the housing market recover. Mission accomplished.
We are now concerned that investor momentum has swung too far in the other direction.
Recent developments include:
- Highest investor activity ever. We now have an all-time high level of investor activity, reaching 30% of all resales in the markets we track and 45% in markets such as Orlando and Florida. We believe that thousands of organizations and individuals now have the capital and infrastructure to invest quickly, and we don't know what will shut it off.
- No more bargains. Price appreciation at the lower end of the market now exceeds 30% YOY in markets such as Atlanta, Phoenix, Minneapolis, and Las Vegas (Case-Shiller data). The bargains are gone.
- Above replacement cost. We are hearing many stories of investors buying new homes, both in bulk and by pretending to be a real buyer in the new home sales office. The great investment thesis of buying below replacement cost is now gone.
- Flippers. House flipping is up 19% YOY according to Realtytrac, and we are hearing radio ads again for companies who will teach you how to flip a home. Never underestimate the American allure of making a quick buck!
- Debt availability. The big institutions have raised debt from banks, and Blackstone recently announced B2R, a platform to lend to medium-sized investment groups. We suspect that small investors are finding or will find debt soon. All of this will allow investors to double their platforms without raising any more equity.
While the permabears or big name economists (who are lucky to have a staff of one focused on housing) went on TV claiming that rising mortgage rates would cause another downturn, and Wall Street responded by selling all things housing, we went public on June 3 and June 26 saying that rising rates were necessary to prevent another bubble. Since investors remain as optimistic as ever, rising rates do not appear to be cooling the market much at all.
At this pace, the Fed will soon accomplish their unstated goal of eliminating negative equity, which will allow for refinancing that will be great for the economy. However, I don't know what will shut off the investors other than another crisis or recession. I am reminded of the Housing Cycles History video we did in March 2008, when the housing market was falling apart, but the economy was still growing. There are some valuable lessons in here worth revisiting, including the Fed's historical role. As for now, the fundamentals still look strong.
© John Burns Real Estate Consulting