Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Why It’s a “Fake” Housing Market Recovery

Friday, January 11th, 2013
By for Profit Confidential

Fake Housing Market RecoveryThe 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 fuelling 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.

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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 indices—meanwhile, nothing has really changed in the U.S. economy or elsewhere in the global economy.

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.

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.

In 2009, when the Dow Jones Industrial Average hit a low of 6,440, pessimism reigned and the outlook was for even lower stock prices. But, instead, the second biggest bear market rally in history began and key stock indices like the Dow Jones Industrial Average rose quickly.

Right now, the popular media, stock advisors, and investors are as bullish as I’ve seen them. I read something the other day that said me and Gary Shilling are the last bears standing. This can’t be good!

Investor sentiment is getting much too complacent? The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is showing investor sentiment turning optimistic big-time. The VIX essentially shows the level of fear in the key stock indices.

$VIX Volatility Index stock market chart

Chart courtesy of www.StockCharts.com

Since the beginning of the year, the VIX has fallen off a cliff, meaning investors hold a very optimistic view on the key stock indices.

As optimism increases and key stock indices rise a little further, you shouldn’t get lured into believing that the stock market is going much higher. The structural, fundamental problems of the economy haven’t been fixed and some big-cap companies are still struggling.

If stock advisors and investors are optimistic on the health of the global economy, they are wrong. The eurozone continues to weaken, global trade is deteriorating, and even emerging markets are starting to struggle. I’m seeing increased optimism based on a whole lot of nothing.

What He Said:

“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in Profit Confidential, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.

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Why It’s a “Fake” Housing Market Recovery, 10.0 out of 10 based on 2 ratings
  • Dave

    Blackstone was the last one in for commercial property too.

  • snakebit

    It's all a fucking bullshit game, and what you can count on is the little guy getting screwed more & more. Time for people to start demanding real change for the middle class that's left. Start by not voting for either republican or democrat candidates, and vote in a real revolutionary that will fight like a dog for us. Both parties are terminally corrupt. There will be no change without removing them.

  • Joe Trometer

    Great article, thank you.

    At these low-prices the small investor like me can buy a free and clear house or two, and that's exactly what I did.

    1 or 2 free and clear houses for the small investor's portfolio just may be the equivalent to huge companies buying up blocks of homes for their portfolio.

    As a do-it-myself rehabber I can take control of my property by fixing it up and adding value; from the fruits of my own labor that I happen to enjoy.
    This has been working for me for decades.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

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