The mainstream is ignoring some of the key aspects of the housing market in the U.S. economy. Because home prices are increasing, it doesn’t necessary mean the housing market as a whole has recovered. There are fundamental changes to the housing market that need to be fixed before there is an actual recovery.
The housing market is missing the most basic component: first-time homebuyers. In November 2012, first-time homebuyers only accounted for 30% of all the sales. Sadly, this number has been decreasing. In October, first-time homebuyers accounted for 31% in the U.S. housing market, and in November of 2011, this number was 35%. (Source: National Association of Realtors, December 20, 2012.)
How bleak is demand by the first-time homebuyers? During the month of November, the 30-year fixed-rate mortgage fell to a record low of 3.35%; it was 3.38% in October. As the mortgage rates went down, logically demand should have increased, but this is not happening in the housing market.
If we don’t have first-time homebuyers, then why are home prices increasing, and who is actually buying? We currently have a housing market that is mainly propped up by the intuitions. Returns elsewhere for investors are next to nothing, so they are running to the housing market.
Companies in key stock exchanges in the U.S. economy are struggling, the eurozone is too risky to invest in and bonds aren’t worth looking at. So, investors are resorting to the housing market; they are buying distressed properties at deep discounts, renovating them, and renting them out to earn a meaningful rate of return.
For example, Silver Bay Realty Trust Corp (NYSE/SBY), a real estate company, raised $245 million in its initial public offering (IPO). The money raised in the IPO will be used to buy 3,100 single-family homes. (Source: Bloomberg, December 14, 2012.) The firm already owns 2,540 single-family homes in states like Arizona, California, Florida, Georgia, Nevada, North Carolina, and Texas.
Silver Bay is not the only firm making massive purchases in the U.S. housing market, other companies like The Blackstone Group L.P. (NYSE/BX) and Colony Capital LLC have also been heavily involved. Together, Blackstone Group and Colony Capital have raised approximately $8.0 billion to buy rental properties.
“Economics 101” tells us that, as the housing market improves, the economy thrives with it. Currently, the U.S. housing market isn’t improving—prices are increasing marginally due to institutions buying homes in bulk and renting them out. First-time homebuyers aren’t there. And until I see first-time homebuyers returning to the housing market, I will not be convinced about the recovery in the U.S. economy’s housing market.
What He Said:
“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in Profit Confidential, April 27, 2004. Michael first started warning about the negative repercussions of then Federal Reserve Chairman Alan Greenspan’s low interest rate policy when the Fed first dropped interest rates to one percent in 2004.