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One of the most encouraging signs of the economic recovery is the increase in housing prices, according to several MSM stories I have seen.

Now it turns out that the increase in housing prices has been driven by speculators -- hot money that can easily turn away from this important sector.

http://dealbook.nytimes.com/2013/06/03/behind-the-rise-in-ho...


New York Times, June 3, 2013
Behind the Rise in House Prices, Wall Street Buyers
By NATHANIEL POPPER

The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.

Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing....

Nationwide, 68 percent of the damaged homes sold in April went to investors, and only 19 percent to first-time home buyers...

Fitch Ratings warned last Tuesday that prices for single-family homes in the regions with the biggest housing rebounds had been outpacing the growth rate in the local economies and “could stall or possibly reverse” if big investors start selling....
[end quote]

Are large speculators, like Blackstone, planning to become REITs in which they manage tens of thousands of rundown rental properties long-term? That labor-intensive, small payoff strategy doesn't seem to fit with their usual investments. I think it's more likely that they are speculating, using their huge cash wad to buy and drive up the price of properties, then cash out. METARs have often discussed how property can be an alternative investment to stocks and bonds.

The Case-Schiller housing index shows that prices are rising. Nationally, home prices are back to their mid-2003 levels.

http://www.standardandpoors.com/indices/sp-case-shiller-home...

Real Disposable Personal Income: Per capita is still about the pre-recession level and has not increased since the recovery began.

http://research.stlouisfed.org/fred2/series/A229RX0

The National Association of Realtors points out that housing inventories are low and that millions of potential buyers were pushed out of the market by the housing crisis. They attribute the decrease in inventory to "accidental landlords" who rented out their underwater homes to avoid default, using the cash flow to house themselves.

http://economistsoutlook.blogs.realtor.org/2013/05/28/accide...


The month’s supply of homes for sale reached a 9-year low in March 2013 of 4.3 months, well below the 6.5 months typical of a balance market. This figure rose to 5.2 months in April 2013 with the normal seasonal increase, but was still 21.2% below the figure from a year earlier. While tight inventories can drive price growth, excessively stringent supplies can create headwinds to demand as consumers are priced out of the market or left with inadequate options.

At the peak, roughly 12.1 million homeowners were underwater on their mortgages owing more than their property was worth. Insufficient equity could preclude owners from buying a larger property to facilitate a growing family or hamper a sale to take advantage of a job opportunity in another market. Likewise, defaulting on a mortgage or short selling, even with agreement from a bank, could damage one’s credit score preventing another purchase for three to seven years....

Since the 4th quarter of 2011, steady price gains have unlocked roughly 1.7 million from negative equity positions....
[end quote]

Putting this data together, it's likely that the increase in housing prices, especially in hard-hit areas, is largely driven by big-money speculators, not by workers with higher real income or by "accidental landlords." The speculators have driven prices higher, reducing affordability for the families who otherwise might be able to buy instead of renting.

All experienced investors have seen what happens when the tide hot money flows in and out, whether it is stocks, mortgage lending or property buying.

If the rising prices of homes were associated with rising real incomes, I would be encouraged. However, I now see the rising prices as unstable and prone to reversal because the asset (run-down rental housing) isn't a good fit with the investment needs of the speculator.

Wendy
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