Monday, January 14, 2013

What is Fueling Housing Recovery??

I had an interesting conversation with an Investor from Russia today. He read two of my recent blogs about a housing recovery. He commented that lending is tight in the USA yet the sale of homes and the prices of homes are both increasing. It did not make sense to him. I have been a partner in two Venture Capital firms and two private equity firms. These types of firms have been buying real estate for many years. It occurred to me that these types of firms were at least partially fueling the current housing recovery. So, I did some research and I was astounded. The National Association of Realtors (NAR) expects average existing home prices in 2013 to be around $185,800, with an increase to $193,600 by the end of 2014. (Source: National Association of Realtors, January 2013.) It appears that what is fueling the recovery in the U.S. housing market and home prices is something that’s never happened in our history. It’s not individuals buying houses that are moving prices and demand higher; it is the institutions. The Blackstone Group L.P. (NYSE/BX) bought $2.5 billion worth of U.S. homes—that’s 16,000 units in total so far, with cash! In October of 2012, the company owned $1.5 billion worth of homes and was spending $100 million a week to purchase more! Other companies like the Colony Capital LLC and Waypoint Homes are taking similar courses of action as the home prices increase. Colony Capital has already purchased 5,500 homes since April of 2012 and expects its investments to increase to $1.5 billion by the end of this year. Waypoint Homes has bought 2,500 home and plans to have a total of 10,000 homes by the end of 2013. Institutions are pouring big money into buying individual homes and fixing them up, and then turning around and renting them. And more and more companies are entering this new “game.” As an example, Silver Bay Realty Trust Corp. (NYSE/SBY) raised $245 million in an initial public offering (IPO), and it plans to get involved in the markets for single-family homes. This is clearly a good situation at first glance since the infusion of cash into the markets has helped fuel recovery. However, there is a downside to this. As soon as institutional investors can get better returns for their money elsewhere, they will be out of housing and moving on to the next thing. Home prices increasing may have been great for speculators and investors, but not for the economy. Paddy Deighan J.D. Ph.D \

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