This Is a Fake Housing Recovery

patriciacw

Inspired Forum Member
REIN Member
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You've got to be kidding. Even most second- and third-time homeowners probably aren't paying 100 percent cash.



The fact that this bull market is driven so heavily by cash purchases tells you that it's not a real housing market. It's another investment bubble.



In some places, like Florida and Nevada, the cash sales represent a whopping 65 percent of the market. And in Arizona, the figure is close to 50 percent.



So booming housing markets are clearly not booming because of a fundamental demand for housing. They're booming because of investment demand.



Why does that matter? An investor-driven housing market is fragile by definition. While general demand for housing depends on fundamentals like household formation growth and income growth, investment demand is much more fickle. It could dry up in a hurry, especially if the market doesn't live up to investor expectations.



Take a company called American Homes 4 Sale, which, after raising over $700 million in its IPO in July, has already laid off 15 percent of its work force. A big reason for that might be the fact that nearly half of the homes the company has bought are still unoccupied.



As always, a bubble can be maintained as long as prices keep going up. But when prices fall, it could create real problems. That's why higher interest rates are not welcome news to the housing market. Add to that the fact that a lot of newly built apartments will be finished in the next 12 to 18 months, and that puts even more downward price pressure on the housing market.



This bubble may not pop in the next few months, but I don't think the long term looks good for a fake housing market driven largely by investors rather than homebuyers.

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Pheenix

Inspired Forum Member
REIN Member
This discussion, while correct fails to discuss several important factors. Lets 'look behind the curtain'.



First consider the change in attitudes toward home ownership (vs renting), as well as the stricter lending criteria. These will have a major impact on the marginal home buyer, but less impact on those both able and interested in RE investment, who will find creative ways to do so.



Therefore a different set of metrics should be of interest to the buy and hold, cash flow investor. These are the new household formations, mentioned but not discussed in the article, and the rental unit absorption rate.



Prior to the financial crisis the US household formation rate was approximately 1.35m and since 2006 it has been less than half that amount, annually. This suggests a huge pent up demand. (See http://www.federalreserve.gov/pubs/feds/2013/201326/201326pap.pdf for a thorough discussion of this)



This is particularly true for basement dwelling, young adults who have had a difficult time finding jobs in the first place let alone the secure, well paying ones, required to become that first time buyer.



The overall vacancy rate has been trending down, to a Q2 rate of 8.3% from a peak of 11.1% a couple years ago. (http://www.census.gov/housing/hvs/files/qtr313/q313press.pdf) Although still above the longer term average of 7.38, this is a positive. There has been a softening in both rental rate increases and the absorption rate in the last few months. However, as mentioned, there has also been substantial apartment construction in many strong markets which may skew some of the data.



Both of these metrics are heavily influenced by the labour market (jobs). In 2012 there was a strong surge in job growth and security (whether perceived or real) and therefore a strong surge in both sales and rentals. Notwithstanding the impact of investor demand, this was complimented by consumer demand. 2013 has not sustained the rate of job growth, but it is still positive (including strong Oct numbers), so naturally both occupancy types will reflect weaker demand.



I haven't seen information about second or seasonal home ownership rates but presumably they have declined due to financial stress among the prime buyers of such properties (financially secure middle agers), and leading to a slight decrease in the absorption of homes. However, many of these people will therefore rent in the prime vacation areas instead.



Although fair to suggestion caution, I think it is simplistic to use 'cash purchases' to reach the conclusion that it is a 'fake recovery'.



Furthermore, real estate is local and investors should be focused on the fundamentals and their application in the market they operate in. Find out if the wall street types are truly active and distorting the market, if so be more cautious, until things adjust.



IMHO
 

housingrental

Frequent Forum Member
Registered
Great post Brad.

You bring up a good point on household formation.

It brought to mind two questions:



What do population growth numbers look like since 2006 relative to prior years that the 1.35mil number was based on?



Has there been an impact on this from a change in age or ethnic makeup? A non-proportionate increase in immigration from areas with multi-generational household could have an ongoing negative impact for REI relative to what population growth numbers might suggest.
 

Thomas Beyer

Senior Forum Member
REIN Member
Like Canada, the US housing market is regional, with rising prices in many markets but flat to declining ones in a few others.



The US has significant immigration and a huge internal population growth, the highest of any developed nation, further analyzed in Mark Steyn's book "America Alone", namely over 2.1 per female, primarily due to the very large hispanic population. As such, invest in markets with job growth and population growth.



The US adds roughly one Canada a decade, roughly 35M people. Huge growth. As such, housing will be in short supply in many regions, or already is.



Our asset in Dallas, TX even during the recession from 2008-2010 had 2-3% annual rent growth, and over 8% the last two years each, with low vacancies and rising rents to continue.



CAP rates in Dallas, TX are similar to Alberta, 5-6% CAP for quality assets in nice A or B neighbourhoods, 6.5-7.5% in C areas. What is available, unlike Alberta, are 20-40% vacant assets with true turn around potential, and of course D areas where rent collection usually requires a gun (and as such not my cup of tea for investing, but perhaps for others.) So if someone shows a "true" 9-10% CAP rate ask why they are selling and drugs, crime and gang activity with associated risk to personal life is usually the reason.



Much opportunity exist in the US, but do your local, and in-depth research as the US is huge. What work in Tampa, Florida may or may not work in Miami, FL let alone AZ or TX . Dig deep. Many regional differences, laws, underwriting criteria and asset values that vary ZIP code by ZIP code. race is a huge issue too, as is crime, s.th. the average Canadian real estate investor in Canada is usually not used to or exposed to.



People have drowned in rivers one foot deep on average (`).
 

Pheenix

Inspired Forum Member
REIN Member
Good questions Adam

I did look but could not find good information quickly. What I did indicated annual rates dropping from 1.3% in the early 1990's to 1.1 in 2000 and a highly varied but down trending rate through the last decade. It had dropped slowly in the first 8 years but dramatically (as one would expect) from 0.99 to 0.88 immediately following the financial crisis. However in the past three it has drooped into the low 0.7's!



Obviously there is a some correlation between population growth and household formation but, clearly more analysis would be required to determine the degree of correlation and lag factors. This is beyond my interest or skill. The same could be said for the demographic make-up of the population.

I'm comfortable looking to others to do the deep analysis and forecasting. As you rightly question, what are the implications for RE investing? I suggest that it is obvious that there must be a lower average demand, but as all real estate is local, it will vary widely across that country.



Simple things like the number of people living alone, both old and young will have a bearing on this. Similarly one would expect this will have on the type and size of the dwelling needed.



So back to the fundamentals; job and population growth and why.
 

Pheenix

Inspired Forum Member
REIN Member
[quote user=ThomasBeyer]

. . .

Much opportunity exist in the US, but do your local, and in-depth research as the US is huge. What work in Tampa, Florida may or may not work in Miami, FL let alone AZ or TX . Dig deep. Many regional differences, laws, underwriting criteria and asset values that vary ZIP code by ZIP code. race is a huge issue too, as is crime, s.th. the average Canadian real estate investor in Canada is usually not used to or exposed to.



People have drowned in rivers one foot deep on average (`).





Exactly; research, caution, block by block consideration - and boots on the ground (direct and/or with trusted associates). As always one has to know the market.
 
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