(The authors are Reuters Breakingviews columnist. The opinions expressed are their own.)(Fixes links.)
By Daniel Indiviglio and Agnes T. Crane
WASHINGTON/NEW YORK, Oct 25 (Reuters Breakingviews) - The recovery in U.S. housing is not as solid as it looks. Prices were up 4 percent in the six months to July, according to Case-Shiller. But that may be built on a less than solid foundation. That’s because cash-rich investors looking to buy properties to rent, whether new or out of foreclosure, seem to be driving the uptick, not regular consumers. That’s helpful, but if investors find better opportunities before individuals jump back in, the recovery may falter.
There’s no solid data on how many houses such investors are snapping up between them. But the Mortgage Bankers Association purchase index currently sits 25 percent below its five-year average. Meanwhile, building permits for new homes rose 45 percent in September compared with the previous year, according to the Census Bureau. Permits for structures with five or more residences surged 93 percent. This strongly suggests that investors are fueling the boom.
Blackstone (BX.N) is one of the biggest players. It now owns 7,000 homes that it rents out. Last week, Chief Executive Stephen Schwarzman said the private equity shop is buying more than $100 million-worth of residential real estate each week. At an average of $150,000 a pop, that’s 666 houses every seven days.
This is good news. Such sales have been a big contributor to stabilizing prices. And it’s encouraging that investors are purchasing these properties without recourse to taxpayer-assisted financing. But the amount of homes for potential sale is staggering: there were some 2.3 million units in the foreclosure pipeline in the second quarter, according to CoreLogic. That amounts to hundreds of billions of dollars worth of houses.
Even if dozens of Blackstones existed to binge on homes, there’s no guarantee they’ll stay in the market until consumers come back. Last week, for example, hedge fund Och-Ziff began shopping its portfolio of 300 foreclosed homes, unsatisfied with the return.
Meanwhile, challenges remain to individuals returning en masse as home buyers. Banks generally only lend if they can pass the mortgages onto federal agencies like Fannie Mae FNMA.OB and Freddie Mac FMCC.OB and financing for borrowers with lower credit remains shuttered.
Investors can fill the gap for now. But if they see opportunities drying up or, worse, start dumping their portfolios if returns fizzle, house prices are likely to stagnate.
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- New single home sales rose 5.7 percent in September to an annualized rate of 389,000, according to a U.S. Commerce Department report released on Oct. 24. At this sales pace, it would take 4.5 months to clear existing new home inventory.
- On Oct. 23, the Federal Housing Finance Agency (FHFA) reported that home prices were up 4.7 percent in the 12 months ending August, in line with levels seen in June 2004. Only homes owned or guaranteed by Fannie Mae and Freddie Mac are used to calculate changes in the FHFA home price index.
- On Oct. 18, Blackstone Chairman and Chief Executive Stephen Schwarzman said the firm was buying over $100 million a week of houses. To date, the firm has purchased $1 billion of individual houses at about $150,000 a piece. The firm counts around 7,000 homes in its residential real estate portfolio.
- The FHFA’s pilot program to sell houses to investors sold only 699 homes owned by Fannie Mae in its inaugural effort to transform foreclosed houses into rental units, according to a Sept. 10 FHFA press release.
- Och-Ziff hedge fund intends to sell its entire portfolio of about 300 foreclosed homes, sources told Reuters on Oct. 17. The report indicates that the return generated from their rental income has been less than expected.
- FHFA release: link.reuters.com/gus53t
- Reuters: EXCLUSIVE-Och-Ziff hedge fund looks to exit landlord business [ID:nL1E8LHC39]
Bull market [ID:nL1E8LBBMZ]
Feeling better [ID:nL2E8EC8V9]
Rental nation [ID:nL2E8D8BHM]
- For previous columns, Reuters customers can click on [INDI/] and [CRANE/]
(Editing by Antony Currie and Martin Langfield)
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