My new friend, Bill, took me for a drive in North Miami Beach last Saturday. You see, Bill is a real estate agent and he’s trying to get me to buy 20 houses. These homes are in the $80,000 range, around 1,000 to 1,200 square feet. They need some work, some come with tenants, and most are being sold by banks that have foreclosed on them.
So, I asked: “How does it work, Bill?”
“It’s a no-brainer,” comes the reply. “Take this typical home. You pay $80,000 cash for it. The current occupant might be the original homeowner. You go to him and ask if he wants to stay and pay rent. Or the tenant might have been put in there by the bank’s property manager. Either way, you’ll get $1,200 a month. You just pay taxes and insurance, which equates to $300.00 a month.”
“Wow, Bill. That’s a return of 13.5% on my money.”
“That’s right, Michael,” says Bill. “Investors are lining up to buy these properties. The goal should be to get to 100 of them, and then we sell to a private equity firm.”
My question to Bill: “Why aren’t families buying these homes to live in?”
Bill says the occupants don’t have the money. They can’t come up with a down payment. They can’t qualify for a mortgage; “they don’t want the hassle of owning.”
“Can we go in lower than the asking price,” I ask Bill?
“No way,” says Bill. “We’ll need to go $1,000 to $3,000 over the asking price, because there will be a line-up of investors bidding on each home.”
There you have it, dear reader. The housing market recovery, just like the rest of the so-called economic recovery, is a fake. Investors are propelling the housing market, not would-be homeowners. And there’s a big difference…as I’ll explain below.
Existing U.S. home sales rose 7.8% to a seasonally adjusted annual rate of 4.82 million units in August compared to 4.47 million units in July—9.3% higher than August of 2011. (Source: National Association of Realtors, September 19, 2012). This is all great news until we look at who is participating in this rebound.
For there to be normal recovery in the housing market, I want to see the number of first-time homebuyers increasing. I want to see buyers who are buying a house to live in, rather to simply renovate, rent and flip—not speculation.
First-time homebuyers accounted for 31% of the purchasers in August—compared to 34% in July and 32% in August of 2011. This amounts to a drop of 9.0% from a month before and little more than 3.0% from a year ago.
The 30-year conventional mortgage is still near its record low. It stands at 3.60% compared to 3.55% in July. It is definitely lower than August of 2011, when it was 4.27%. If lowering the mortgage rates to boost the housing market was the plan, then it is achieved. But the participation rate of first-time buyers is going the opposite way!
First-time buyers entering the housing market combined with borrowing will provide for a healthy recovery in housing market. But we have the opposite happening—many all-cash transactions by investors buying homes to rent them.
In 2011, mortgage lending declined to a 16-year low. Banks funded 7.1 million mortgages—10% down from 2010 and the lowest tally after 1995 when banks issued only 6.2 million mortgages. (Source: Wall Street Journal, September 19, 2012.)
The demand in the housing market looks to be increasing, because investor and private equity firms are buying foreclosure homes with cash—then they simply rent the homes for a higher return than they are paying on their invested capital.
Twenty-two percent of all U.S. home sales in August were in distressed homes and 12% in foreclosure properties!
From the looks of it, the “bounce” in the housing market is not very convincing. There are private equity firms and investors that are buying foreclosure homes. The housing market lacks the participation of first-time homebuyers—they are the ones who buy the fridges, lawn mowers, and other consumer goods for pride of home ownership.
Real homeowner buying is lacking in this housing market recovery for two reasons: lending is still bleak, as banks have tightened their lending standards; and people don’t want the hassle of owning a property that may decline in value when renting is so much easier.
A true housing market recovery is accompanied by many first-time homebuyers entering the market, more lending, and not a lot of cash transactions—three things that this housing market recovery lacks..
Michael’s Personal Notes:
The Chinese economy has been a powerhouse of manufacturing for years. China has grown significantly and surpassed Japan to become the world’s second biggest economy—right below the U.S economy.
But today it’s a different story. The debt crisis in eurozone has put the Chinese economy under scrutiny. The eurozone was the biggest trading partner of China, but now with its outlook so bleak, trade between the eurozone and Chinese economy has fallen significantly. China’s exports to the eurozone fell 16.6% in July compared to a year ago. (Source: Global Times, August 30, 2012.)
Manufacturing in the Chinese economy has now contracted for 11 months in row—the longest decline since 2004. Chinese factories are slowing down.
The slowdown in the Chinese economy is widespread and the government is taking action constantly to deal with it. China is a major player in the global economy; any slowdown in the global economy affects its prosperity.
In China, there have been interest rate cuts in June and July and the Chinese government has been injecting cash into the Chinese economy to combat the forces affecting its growth. China has also lowered the reserve requirement by banks and freed about 1.2 trillion in yuan.
Now the Chinese government is stepping in and showing some willingness to help out the countries in eurozone, which comes as no surprise at all. China is willing to buy eurozone bonds if the countries are able to find a balance between fiscal austerity and economic stimulus
Why would China do such a thing?
The reasons are simple. In order for China to grow, it has to make sure that the eurozone gets out of the debt crisis. The eurozone getting out of the debt crisis would mean increases in demand and more trade between China and the eurozone.
This reminds me of back when U.S economy was facing troubles and the Chinese government came in and bought our debt.
Certainly, America cannot afford to do what China does, coming to the aid of the eurozone. America simply doesn’t have the money to bail out the eurozone, as we are already knee-high in debt. The U.S economy is certainly affected by the slowdown in the global economy, but this time we can only be a spectator.
But the problem with China is getting true statistics out of its statistics offices. If China helps the eurozone, where will the money come from? Will it pull from its reserves of U.S. dollars? One thing we do know about China is that its central bank has become a big buyer of gold bullion. China will likely surpass India this year as the world’s biggest buyer of gold.
Three things are happening here. China’s economy is growing at its slowest pace in years. The country wants to help the eurozone (lend it some money) and China is buying gold. Where is this all leading? If I didn’t know any better, I’d think it means getting out of U.S. dollars and into gold.
Where the Market Stands; Where it’s Headed:
Patience is a virtue, dear reader. And those investors who have had the experience of riding the bear market rally higher since March of 2009 are the same investors who need the patience to see the market put in its top. In technical analysis terms, the stock market is working on putting in a major market top. And we’re almost there.
What He Said:
“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.