According to a report by Goldman Sachs, approximately 57 percent of the homes that were purchased in the first quarter of 2013 were all-cash deals. In 2005, the peak of the bubble, all-cash buyers represented a mere 19 percent of all transactions. The amount of investor capital pouring into housing is unprecedented. Moneybag speculators and Private Equity firms have been loading up on real estate like it's going out of style, and for good reason; according to this week's Case Shiller report, housing prices soared more than 12 percent in the last year alone which means that the return on investment rivals the red-hot stock market. Of course, there is a downside to the rising prices phenom as Yale professor Robert Shiller pointed out on Tuesday in an interview on CNBC. Shiller said:
"[Housing today] is a speculative market that is driven by irrational exuberance that can suddenly change... It's risky. ...The momentum that we have seen historically may be weakening, because there's so many more professionals in the market. It's obvious to me what these hedge fund people are thinking. They're thinking, the market has real momentum and it's going up, so I can buy something and flip it a year later. (But) This idea of a lot of speculators in the market is not healthy."
Analyst Diana Olick summed it up more succinctly on her Realty Check blog on Wednesday. She said:
"Housing has morphed from a form of shelter to one of the most popular tradable assets, thanks to a huge influx of institutional investors in a mammoth, albeit decreasing, supply of distressed properties. That is why it should come as no surprise the housing market is now nearly as volatile as the stock market." (Realty Check)
Okay, so the flippers and speculators are back and there's a little froth in the market, but does it really matter? After all, no one's complaining, right?
Right. Not yet, at least. But that's just because the hot money is still pouring in and pushing up prices. Once the speculators realize that they're not going to make the killing they thought, then the money's going to dry up, most of the equity gains of the last year will be wiped out, and there'll be a stampede for the exits. And judging by the weakness in mortgage applications -- which according Mortgage Bankers Association (MBA) have dropped 16 percent since early May -- and the sharp decline in new home sales -- which according to the Commerce Department plunged 13.4 percent in July -- that day may have already arrived.
The drop in mortgage applications suggests that demand for single family construction was already weakening when the Fed announced its plan to scale back its asset purchases. The announcement just made matters worse by pushing mortgage rates higher and putting the kibosh on future sales. Here's Olick again:
"Investors made up just 16 percent of home buyers nationally in July, according to the National Association of Realtors, compared with 22 percent in February ... During the worst of the foreclosure crisis, in some of the hardest hit markets, investors had made up more than half of all buyers...
"Large funds like Colony Capital, Blackstone and Waypoint bought thousands of properties, and drove prices higher, faster than most expected. Now they are focusing on filling those houses with renters." (Diana Olick, Realty Check)
There's no "two ways" about it; if the investor share shrinks, prices will either flatline or tumble. But, where's the proof that investors are throwing in the towel, after all, didn't existing home sales just beat all analysts estimates?
Yep, they sure did. Sales climbed 6.5%, which was leaps and bounds over analysts predictions. But here's the problem; existing sales data is based on closings in May or early June, before the rate increases took effect, so they don't tell you what is going on in real-time. The truth is, we won't know the extent of the (rate) damage until late September. Some analysts figure that September's existing home sales are going be a massacre, but no one knows for sure. Even so, Wall Street is worried, very worried. Here's a blurb from G-Sax in Capital Report:
"The Fed probably shares our concern about the recent numbers, strengthening the argument for continued support for the [mortgage-backed security] market... even if it begins cutting back on asset purchases next month, Goldman analysts wrote." (Goldman Sachs says housing has hit "a pothole,"
Capital Report)
In other words, Goldman thinks housing sales are headed for a cliff and they want Bernanke to keep buying the same amount of MBS as he is presently. Olick thinks there's trouble ahead too and says so in this video piece that was released on Wednesday on CNBC.
Diane Olick: "I just got off the phone with Redfin's Greg Kelman and he said he's seeing a huge slowdown in existing home buyers now and says armchair investors who are using credit are getting out." ("Housing takes a bearish turn," Diana Olick, Realty Check, CNBC video)
Investors are getting out?
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