Many people and much of the media are pointing to recent improvements in home prices as a sign that the single family home market is bottoming and starting to recover. It seems to me that an alternative way to look at recent changes in the housing market might be to look at things a bit differently.
How about reading the tea leaves this way:
Several institutional asset managers have convinced investors that buying single family homes ‘in-bulk’ and then renting the houses or flipping them is a good business that will provide better yields than most other investments currently available (in The Bernanke Economy). However, it seems the institutional asset managers that are doing this have ignored that single family home property management and single family home ‘flipping’ are generally not ‘scaleable’ activities. That is, the operational costs of single family property management and single family home 'flipping' are very high, and the activities involved usually cannot reach economies of scale.
Meanwhile, the media is reporting a recovering market in housing. And, some homeowners who have discretion about the timing of selling their homes make a discretionary decision not to list their home and to wait for a better price – because all indications and the media say home prices are rising. This reluctance to list reduces the LISTED inventory, which further creates the appearance of a recovering housing market.
Then, in a few months, the investors in the institutional funds that have purchased homes 'in-bulk' begin to realize the institutional managers are not reaping the expected returns and they begin to cash-out of the institutional home buying funds. This cashing-out forces the institutional funds to sell the homes they bought ‘in bulk’ at the best price they can get.
Many very smart institutional investors have mentioned the operational difficulty and lack of ‘scaleability’ as reasons bulk home buyers may not succeed at single family home property management and / or single family home ‘flipping’.
Private Equity Has Too Much Money to Spend on Homes By John Gittelsohn | pub. Bloomberg News - Jun 12, 2012: http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-money-to-spend-on-homes-mortgages.html
Institutional Investors Are Turning to Residential Foreclosures Investing in single-family rental market in its infancy By Arleen Jacobius | Pensions & Investments April 2, 2012: http://www.pionline.com/article/20120402/PRINTSUB/304029978
Insight: The Wall Street Gold Rush in Foreclosed Homes By Matthew Goldstein & Jenneifer Ablan - Forbes Magazine 3/20/2012, at: http://www.reuters.com/article/2012/03/20/us-usa-foreclosures-investors-idUSB...
Investors Flock to Housing Looking to Buy Thousands of Homes in Bulk By Morgan Brennan - Forbes Magazine 4/3/2012, at: http://www.forbes.com/sites/morganbrennan/2012/04/03/investors-flock-to-housing-aspiring-to-own-thousands-of-homes/
Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business Submitted by Tyler Durden on 10/17/2012 http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
The Housing Bet Warren Buffett Wishes He Could Make By Steve Shaefer pub. Forbes Markets 3/29/2012: http://www.forbes.com/sites/steveschaefer/2012/03/29/the-housing-bet-warren-buffett-wishes-he-could-make/#
Critics Question Investment Fund’s Sacramento Rental Venture By Hudson Sangree and Philip Reese Sacramento Bee – Monday April 8, 2013 http://www.sacbee.com/2013/04/08/5323832/critics-question-investment-funds.htm
Lower Rates Push Yield Seekers to Higher Risk By A. Gary Shilling – Bloomberg News - Jan 29, 2013, at: http://www.bloomberg.com/news/2013-01-29/lower-rates-push-yield-seekers-to-higher-risk.html
Warren Buffett Says, “Buy Real Estate Now!” at the same time he mentions the problem of “scaleability” see video from CNBC Squawk Box pub. February 27, 2012: https://youtu.be/XOGP6hd0B24
By Gregory Zuckerman
Wall Street Journal – December 29, 2011
Comment:Many commenters here have used the term 'Shadow Foreclosures' the proper term is "Shadow Inventory'. Shadow inventory represents the excess supply of housing. Banks and other mortgage investors have been deferring foreclosures (for several reasons) but one primary reason is because they realize if all the inventory was to come to market in any short time period home prices in most markets would plummet (further). It's estimated, by S&P, that the current shadow inventory will take about 45 months 'to clear'.1 A subtlety, hedge funds invest other peoples' money (o.p.m.) and they collect an annual management fee while they wait for their strategy to pay-off. If the strategy pays-off they get a very large incentive bonus (portion of the profits). Hedge funds generally will not allow investors to 'cash-out' for a couple of years after the investor deposits his or her investment (the 'lock-up' period). So, the idea is to sell a very risky or a very volatile strategy, so you can get the management fee while you wait for - and hopefully eventually reap - the huge incentive fees.2What happens when a hedge fund strategy "blows-up"? The manager moves-on to a different strategy, and most likely, a different group of investors. Picking the bottom of any market is a timing issue, by the time these hedge fund "lock-ups" have expired most of the investors will probably start to see signs of life in the housing market and will decide that after a couple years of pain, during the "lock-up", it's probably a good idea to hang-in-there and perhaps enjoy some profit. In my opinion the hedge fund managers in this article are following a contrarian strategy and may be quite early . . . but, it takes time to convince those hedge fund investors to invest.Remember, home prices change at the margin, one-sale-at-a-time, the next sale is based upon comparable sales and an appraisal - and in most cases - the completion of the sale is dependent upon the availability of mortgage financing. Watch unemployment and don't just look at the published numbers for mortgage interest rates, look at the number of new mortgages actually issued. If what used to be a qualified buyer can't buy, the excess inventory will not be absorbed by anybody but investors who want to be landlords. I believe Mr. Mark Hanson (in the article) has the proper current view of the housing market.Footnotes:1. see article, S&P: 45 Months to Clear Shadow Inventory By Kerry Panchuk pub. Housing Wire November 23, 2011 - at: http://www.housingwire.com/2011/11/23/sp-45-months-to-clear-shadow-inventory2. see Introduction pages 1 and 2 to A Balancing Act: Privacy, Regulation, and Innovation in Hedge Funds By Thomas Van De Bogart and Justin Blincoehttp://www.ethicapublishing.com/inconvenientorinvasive/2CH17.pdf