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The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out

Housing Bubble 2: Sales to institutional investors plunge to lowest level since 2010

In real estate, particularly in housing, national averages elegantly paper over the gritty details on the ground in specific metro areas and neighborhoods. When a new trend starts in some locations, it’s neutered by data from other locations. Blips and squiggles are averaged out of the picture. But by the time changes consistently show up in national averages, they’ve taken on serious weight on the ground. And now the “smart money” – smart because it has access to the Fed’s free moolah – is abandoning the housing market.

Wall Street money entered the housing market gingerly in 2010 and 2011, then piled helter-skelter into select metro areas over the next two years, grabbing vacant single-family homes out of foreclosure with the goal of first renting them out, then selling to yield-desperate investors and unsuspecting mutual-fund holders their latest toxic concoction: rent-backed structured securities that are even worse than the mortgage-backed structured securities that helped take down the financial system only a few years ago.

It worked. Each wave of buying ratcheted up prices via the multiplier effect, not only in the neighborhood but beyond. It created instant and juicy paper gains on all prior purchases. In this way, the same companies, now mega-landlords, were able to push up the value of their own holdings with new waves of purchases. It was a wonderful game while it lasted. And it was funded with nearly free money the Fed graciously made available to the largest players. Housing Bubble 2 came into full bloom.

But these billions of dollars being pumped into the housing market had the effect of pushing prices out of reach for many potential homeowners who’d actually live in these homes. And first-time buyers, the bedrock of the housing market? Well, forget it. Their share of purchases dropped to 33%, the lowest since 1987.

These inflated prices had another effect: the buy-to-rent business model collapsed. Rents were rising, but people are strung out, and so rents couldn’t rise fast enough to keep up with soaring home prices. At some point, depending on the dynamics of the metro area, the buy-to-rent equation stopped working. And now institutional investors have massively thrown in the towel:

Sales to institutional investors in the third quarter plunged to 4.3% of all sales,RealtyTrac reported. It was the lowest level since Q4 2010. The big unwind.

This is how the “smart money,” coddled by the Fed and encouraged to do just these sorts of things, has reacted to the recent home prices that it so strenuously inflated: It bailed out.

US-home-buyers-institutional-investors-Q3_2014

 

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