Last year was a good one for the housing market. Sales rebounded somewhat, the inventory of homes for sale declined, and home prices reversed course and climbed in many parts of the country.
As I’ve said before, some of that recovery was based on natural, “core” forces — with the passing of time since the implosion of the bubble, a gradual recovery in buyer confidence, and some improvement in the job market, it was only natural to see housing begin to turn.
But I also warned that the market has increasingly been turbocharged by artificial demand. That demand stems from the incredible search for yield among institutional and individual investors.
Driven to despair by the reckless policies of global central banks, which have sliced the yield on safer investments like high-quality government bonds, they’ve flooded into the housing market like marauding swarms of locusts. They’ve been snapping up houses to turn around and rent them out, often paying cash, to generate yield.
But because they’re under such tremendous pressure, they’re aggressively outbidding each other, as well as traditional buyers. They’re paying too much money for too little of a rental income stream. And I believe that has set the stage for another housing market pullback — not one as bad as we had last time around, but something of a low-grade “Echo Bust.”
It’s All about Where the Demand is Coming From
In a normal housing market, demand and pricing is driven by average buyers. Think of people just looking to put a roof over their heads, using traditional mortgages, reasonable down payments, and the like.
But much more demand these days is coming from firms like Colony Capital. Never heard of them? Well, Colony is an investment company based in Santa Monica, California. The company has raised more than $2 billion to buy scores of homes all around the country. Their portfolio totaled roughly 7,000 homes as of March, up from 5,400 at the end of last year, which itself was DOUBLE the level of a quarter earlier.
|Artificial demand is behind today’s housing boom.|
Now 7,000 homes isn’t a lot in the grand scheme of things. But Colony is far from alone. Even bigger firms like Blackstone are active in the same business, amassing 20,000 homes at a pace of about $100 million in purchases per WEEK.
Moreover, a ton of “me too” competitors are doing the same thing. One example of the fallout: The Wall Street Journal noted in late March that more than 31 percent of the homes purchased in Southern California early this year were bought by “absentee” buyers, those who don’t actually live in the homes. That was far above the long-term average of 17 percent that prevailed between 2000 and 2010.
I don’t know about you. But my memory of the last investor-driven boom in house sales and prices is pretty fresh. From what I recall, that 2003-2005 speculative bacchanalia didn’t exactly end well. So I find it interesting that there are already a few tentative signs that the turbocharged market is losing altitude.
Just consider home builder sentiment. A key index that tracks buyer traffic, current sales, and expectations about future sales dropped to 42 in April from 44 in March. Not only did that miss expectations for a reading of 45, it was also the third monthly decline in a row. That’s not what you want to see during the heart of the spring home buying season.
Meanwhile, single-family housing starts slumped 4.8 percent between February and March. Single-family permits also slipped 0.5 percent on the month, indicating a cooling in future construction activity.
Perhaps the biggest concern of all are the dramatic, investor-driven, high single-digit and low double-digit price surges we’ve seen in speculative markets like Phoenix, Las Vegas, Miami, and so on.
Are WAGES rising that fast in those markets?
Is JOB GROWTH or economic growth accelerating that quickly in those markets?
Of course not!
The wider the gap gets between price gains caused by traditional demand drivers — and price gains fueled by artificial investor demand — the greater the risk of a nasty correction.
What to Dump if Real Estate Stalls …
Many investors and analysts on Wall Street are in love with housing stocks, mortgage stocks, and almost anything related to them. But have these people noticed that shares of leading homebuilders like D.R. Horton (DHI) and Lennar (LEN) have given up all the year’s gains? Or that they’re basically trading where they did last September?
Or how about the mortgage-levered banks like Bank of America (BAC)? If the housing and mortgage markets are so strong, then why the heck did BofA just miss first-quarter profit estimates, citing weak mortgage performance?
Its consumer real estate services loss widened to $1.31 billion from $1.14 billion a year earlier, with both mortgage servicing and mortgage production revenue falling. Mortgage banking revenue also sank 9 percent sequentially at industry behemoth Wells Fargo (WFC), while application volume fell.
My advice is that you take profits in housing-sensitive stocks if you’ve been riding them higher. If you haven’t — and are looking for someplace to target profits or hedge downside risk using short sales or put options — those may be the kinds of stocks to target.
… And Where to Put Your Money Instead!
At the same time, what can you buy instead? Especially in light of all the points I’ve been making lately: Namely, that many types of bonds are loaded down with risk … while some particular stocks look incredibly promising?
Well, I’ve spent several weeks identifying six bond-trumping investments. The result of my exhaustive research is a report I’m calling “Beating the Bond Bubble: 6 Bubble-Busting Investments for Income and Profit!” Set for release on Monday, May 6 — just over two short weeks from now — this comprehensive report is jam-packed with information, such as …
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* The 286 best and worst stocks to own as bonds tank — plus the one little-known corner of the bond market still worth considering!
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Until next time,
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