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A Giant Sucking Sound: Is the Big Money Exiting Housing?

By       Message Mike Whitney     Permalink
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Yer darn tootin' they are. Check out this report from Reuters titled "Higher prices sap foreign interest in U.S. real estate":

"Foreign investors, who rapaciously scooped up U.S. real estate during the 2007-2009 recession, are backing away from the same markets they so eagerly jumped into a few years ago.

Real estate brokers say demand from international investors has flagged in locations that have been most attractive to overseas buyers -- markets such as San Francisco, Phoenix, Las Vegas and Miami.

Calamitous declines in many of the nation's housing markets during the economic crisis had attracted droves of international investors seeking to cash in on a weak U.S. dollar and rock-bottom property prices. Many were attracted to Sun Belt markets that had been battered by the crisis. The opposite trend is now gathering steam...

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"Real estate is no longer the bargain it once was for foreigners. That is discouraging new sales, while many foreigners who already own property -- especially those who bought strictly as investment -- are turning into sellers." ("Analysis: Higher prices sap foreign interest in U.S. real estate," Reuters)

There are three things going on here:

1 -- The banks have reduced the availability of distressed property in order to keep prices artificially high.

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2 -- Property management, that is, transforming cheap, distressed property into rental units, is not as lucrative as many investors thought it would be.

3 -- Rates are nearly back to 2011 levels (5%) when the demand for housing was near zilch.

Bottom line: Foreign investors and PE firms with boatloads of cash have been driving the market. Now that's changing. Take a look at this from Bloomberg:

"American Homes 4 Rent (AMH) yesterday fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss.

"The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month... The Malibu, California-based company, which raised $705.9 million in the IPO, had a net loss of $14 million, or 15 cents a share, on revenue of $18.1 million in the quarter ended June 30, according to a statement this week.

"Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants...

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"American Homes 4 Rent owned 19,825 properties for an investment of $3.4 billion as of July 31, according to its earnings statement. About 56 percent of the company's homes were leased as of June 30." ("American Homes 4 Rent Said to Fire Employees After Loss," Bloomberg)

Property management just isn't the golden goose these guys thought it would be, so they're either trimming their sails or packing it in altogether. This trend will undoubtedly gain pace in the months ahead, especially now that the Fed's rate stimulus has ended and the 30-year fixed is edging towards 5 percent, the red zone.

In any event, the slowdown in housing is here, it just hasn't shown up in the data yet. I expect the Fed to surprise everyone with an announcement that it plans to INCREASE its monthly purchases of Mortgage-Backed Securities (MBS), even while it "tapers" its purchases of US Treasuries. (UST)

Bernanke has roughly 4 weeks to avoid a full-blown train-wreck in housing sales. If he doesn't push down mortgage rates fast, he's going to have a bloodbath on his hands, and that's probably not the way he wants to be remembered.

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Mike is a freelance writer living in Washington state.


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