Tag Archives: Real estate economics

Is the new kind of real estate investor to blame for the falling home ownership rate?

Is the new kind of real estate investor to blame for the falling home ownership rate? The current data on investor purchases, home ownership, and all cash purchases.

One piece of housing information that warrants a deeper analysis is the continually falling home ownership rate.  Since the recession hit over 5,000,000 Americans have gone through the process of foreclosure.  Yet for over a year now, the housing market has been recovering with lower interest rates, higher home prices, and a record low amount of inventory.  Yet even on the national inventory front, it does look like some pressure is being released on this end.  US housing starts are bouncing from the bottom and this will add much needed relief on the inventory side.  However, this doesn’t answer why the home ownership rate has fallen so hard.  Trying to explain the dichotomies in the housing market is like trying to wrap your head around dark matter.  Sure, those that went through a foreclosure are likely now in rental housing.  But as foreclosures become a smaller part of the market, why does the rate continue to fall like dominoes falling over one another with momentum?  And the term “investor” has definitely shifted in the last few years.  Let us take a look at the overall trends first.

The shift in investors

The peak year in home sales was in 2005 when over 8,000,000 new and existing home sales took place:

Home Sales By Type of Sale

Keep in mind the above focuses on transactions.  It was the case that some homes were being sold multiple times in one year given how hot the market was and how easy it was to get a loan (this applies to 2003 through 2007).  But look at the amount of investment purchases in 2005 (over 2,000,000).  Even in 2012 when investors essentially dominated the market, it was about 1,000,000.  So why does it feel like investors are more dominant today?  First the amount of supply is low:

month supply of homes

Months of housing supply is still near record lows (at 4 months of inventory).  Yet overall sales are definitely picking up reaching 5,000,000 in 2012 and we are on pace for 5.4 to 5.6 million this year combining existing and new home sales.  So why is the home ownership rate still falling?  There are a few reasons:

-Shift in investors:  Many prior investors were regular buyers purchasing second homes to either flip or try to rent.  So you had many that had one, two, or more properties but the owner was one person.

-Foreclosures still occurring:  People are still losing their homes.

-One and done transactions:  Many of the modern day investors are big hedge funds.  So you have one large entity owning 100, 500, 2000, or even more properties under one name.

I think the last item is probably the big difference here.  The shift to all cash purchases shows big money has moved strongly into the rental business.  Some of the big investors are looking at buy and hold strategies that will keep inventory off the market for a few years versus the buy and flip investors from the last housing boom.

When you buy 1000 properties, you don’t have it under individual names.  It is registered likely under one entity.  This is adding to the change.  But also, a larger portion of Americans are renting because of their financial situation or because of a change in preferences.  Many younger Americans are still trying to find their footing in this economy and many carry mountains of student debt.  It will be interesting to see if younger Americans carry similar desires of home ownership as the previous generation.

The all cash buyers

Another big point is the investors of the last boom did not have the capital to buy their investments.  In fact, most were leveraging all the way.  Although the last boom obviously saw more investor action, it was more of the mom and pop variety.  We can see this with the all cash purchase activity:

all cash buyers

Notice that in 2005, the peak of “investor” buying, all cash purchases were rather low in highly speculative markets.  Orlando was below 10 percent in 2005 but in 2010, 2011, and 2012 the rate was above 50 percent for all cash purchases.  You can see the boom of all cash investors.  In Southern California, the figure has been above 30 percent for a couple of years now.

This is why you have an increase in home sales yet the overall home ownership rate continues to look like this:

homeownership rate

There are a few reasons for the drop but it is clear that bulk buying of properties from Wall Street for renting purposes has caused supply to drop, prices to increase, and the home ownership rate for Americans to drop.  As someone mentioned in an e-mail, what use is a great mortgage rate when investors are outbidding and overbidding regular buyers?  We are now five months into the year and the trend continues to move on.  We are seeing a shift in inventory nationwide and also, some larger investors are losing their appetite as yields get squeezed.  However, housing starts have picked up significantly since the bottom:

ushousing starts

This is crucial given the very low level of inventory.  However housing starts are a leading indicator here because it will take some time before this inventory hits the market.  I think the above information does add some clarity as to why the home ownership rate continues to decline in spite of rising home sales, higher home prices, and what appears to be another boom in the housing market.

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PIMCO: The U.S. Housing Market’s Road to Recovery: Slower Speed Limits and Stricter Enforcement

The U.S. Housing Market’s Road to Recovery: Slower Speed Limits and Stricter Enforcement

Michael CudzilDaniel H. Hyman

Picture a six-lane highway with roughly 110 million cars. The posted speed limit is 55 miles per hour, but there is not a police officer in sight. Since there have not been any major accidents in years, it is common practice to travel at 90 miles to 100 miles per hour, and insurance companies are lowering their premiums – often regardless of the state of the cars.

That describes the U.S. mortgage market from 2003 to 2006. The story ended exactly as you would imagine: a massive accident with severe repercussions not just for housing, but also for the financial system and the global economy.
Today, the six-lane highway has been reduced to three lanes, as origination capacity has been halved. One is a fast-pass lane for customers who have been sitting in traffic the past couple of years and are now being rewarded for good behavior with access to historically low mortgage rates: the HARP lane. (The Home Affordable Refinance Program helps homeowners refinance who are underwater or near-underwater but current on their mortgages.) But for everyone else, the speed limit has been reregulated to 35 miles per hour. There are police officers at every mile marker, and the insurance companies are charging much higher premiums.
Where do we go from here?
Despite fewer lanes on the mortgage highway, we believe the U.S. housing market has bottomed and is showing clear signs of a gradual and broadening recovery. The upward trajectory of housing prices should continue at a moderate pace. Over the past 100 years, housing has appreciated at roughly the rate of inflation. It is only in the past 10 years that housing has traded with substantial volatility due to leverage and “affordability” products. We believe the tailwinds are in place for an 8%–12% appreciation in housing over the next two years. Over the longer term, we expect a return to historical normal performance for housing relative to the rate of inflation.
We consider several dynamics in developing our outlook on housing: household formation, inventories, affordability and access to credit and lending.

Read More …

 
Conclusion
We remain constructive on the state of the housing market but recognize the road is far from smooth.
On balance, we believe the positives outweigh the negatives and look for housing to appreciate 8%–12% over the next two years. Housing should have positive influences on consumer confidence and labor mobility.
In terms of investment implications, we believe both agency and non-agency markets offer opportunities to generate excess returns, while active management should be able to add value to structural allocations. Agency mortgage securities offer liquid investments that can be traded against each other as well as against other liquid interest rate markets, specified mortgage pools and, less frequently, structured mortgage products.
Non-agency mortgages continue to offer the best risk-adjusted returns in the sector, but specific security selection will matter much more given their recent high returns. Compared to investing directly in real estate, which requires time to close, lawyers, insurance and transaction costs, non-agency mortgages offer similar returns without the friction. Pairing non-agency mortgages with agency mortgage-backed securities potentially provides an attractive return profile across a wide range of economic outcomes.

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