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
Don't forget the role of the rating agencies in the financial crisis. In the 1975 the U.S. Congress designated the Nationally Recognized Statistical Rating Organizations (NRSRO's). When Congress passed the legislation anointing the NRSRO’s it gave this limited number of organizations oligopoly status and unique competitive advantage. At the same time, Congress appointed the Securities and Exchange Commission as regulator of the NRSRO's.
Most investment advisors and portfolio managers use rating agency guidelines (ratings) to assist their evaluation of the quality and risk associated with the securities they purchase* and fiduciaries are restricted by law as to the minimum rating level from which they can select the investments they can purchase and manage. So, the rating agencies provide a seal of approval, so to speak, for the securities and companies they rate.
* In most cases, the ratings securities an investment advisor, or a portfolio manager will use are defined in a prospectus, offering circular, or by some other form of disclosure.
and Too Little, Too Late
Why is there a ‘shadow inventory’ of homes?
In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced. So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.
But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).
By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.
Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)
* See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting
Federal Regulators Don't Want To Know