Wall Street Pours Money Into Troubled Housing Markets

June 16, 2013
By Vlad Karpel

Rise in Housing Prices

Over the past few months, housing prices have skyrocketed to figures that are highest since 2008.  This surge in prices has been the result of a robust consumer demand over a tight-fist pool of housing units. Consumer confidence index reached a five-year high in May. The index rose to 76.2, the strongest figure since February 2008 and higher than economists had forecast.

This development in the housing industry, which indicates a growing consumer confidence, has triggered a rally on US stock markets with prices closing at new highs. The Dow Jones Industrial Average gained over 106 points to close at 15,409, while Standard & Poor’s 500-stock index closed up 10.46 points at 1,660.

Wall Street Involvement

The question now is, what has been causing this unprecedented burst of consumer demand? Answer: Wall Street.

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 and resulting price gains have been so high, to the point that ordinary buyers feel like they are being pushed against the wall.

“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Ratings. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”

In the 2006 housing boom, Wall Street played an essential role by supplying easy — and in hindsight, risky — mortgage financing. Today, investment companies like the Blackstone Group and Colony Capital are taking bold steps buying thousands of houses in the same areas where the financial crisis hit hardest.

As of today, Blackstone has purchased some 26,000 homes in nine states and has opened 14 offices across the country to serve the homes it has bought. On the other hand, Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. Firms like Blackstone and Colony Capital purchase homes and rent them out, with the possibility of reselling them at a profit when prices rise high enough.

According to Campbell HousingPulse, all throughout the US, 68 percent of the damaged homes sold in April went to investment firms, and only 19 percent to first-time home buyers. This has been helping to push up prices and build confidence in the broader markets.

Different from 2008 Scenario

With the recent turn of events, some investors fear and ask “Prices were skyrocketing so high before, then it suddenly crashed and burned. Is this going to happen again?”

Analysts believe that the scenarios today is much different from before because the dominant key players now are huge investment firms and the critical risks of the real estate boom that has led to its 2008 downfall will not apply. This is because these investment groups are not heavily indebted, making them less vulnerable to small movements in real estate values, and the risks are not spread as widely through the financial system.

Furthermore, companies are now tighter than ever with credit and will continue to be.  Now, it’s harder for people with suspect credit to get a mortgage. The only ones who receive mortgages are those who pass an intensive credit investigation which mitigates the risk of uncollectibility.

Rise in Seller Confidence

Furthermore, in response to rising demand, we have also seen a corresponding boost in seller confidence. According to Steve Berkowitz, CEO of Move (a leading corporation in online real estate) in a report “Nationally, there are more homes going on the market for a shorter amount of time. And this is happening in our hot markets on a much larger scale.”

Also, a survey conducted by Fannie Mae a top company dealing with residential mortgage credit in the U.S. secondary market, revealed that 40% of Americans believe that now is a good time to sell. That’s up from 30% a month ago and 16% a year ago.

Investment Opportunity

Given all these developments, what do these statistics mean for potential investors?

The housing market has been seen as a challenge in the economic recovery of the US. With the rise in consumer demand and seller confidence, it indicates that national economic recovery may be faster than expected. Specifically, these recent events are indicators of a healthy business growth in the housing industry and investors can pour in money in this market with a reasonable expectation for sustainable profits in the long term.

In particular, Home Builder stocks, Home Builder ETFs and Construction ETFs will likely ride the current wave and as such, buying these types of stocks would be a wise investment decision.

The following are companies that investors may consider to choose from should they decide to seize the investment opportunity brought by the housing industry: DR Horton (DHI), Lennar (LEN), KB Homes (KBH), PulteGroup (PHM), NVR Inc. (NVR), Ryland Group (RYL), SPDR S&P Homebuilders (XHB), iShares Dow Jones US Home Construction ETF (ITB), PowerShares Dynamic Building and Construction ETF  (PKB).

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