Just passing along some interesting thoughts from Lance Roberts on housing given that the recent buying has been so disproportionately influenced by institutional investors:
I discussed at length last week that the recent housing data was most likely NOT just a short term weather related issue. The rise in interest rates since June of last year is now working its way through the system as re-financing activity has been decimated(as witnessed by mass layoffs of mortgage bankers), rental profits are being crushed by rising prices and household formations continue to fall. Of course, as we have discussed many times in the past a large chunk of the reduction in housing inventory was driven by all-cash speculators buying houses and turning them into rentals.
The question has always been: “What happens when that speculation cycle eventually comes to an end?”
“Alas, just like the rental bubble whose bursting we chronicled here just last week, so the institutional bubble has just popped, which we know courtesy of RealtyTrac data reporting that institutional investors — defined as entities purchasing at least 10 properties in a calendar year — accounted for 5.2 percent of all U.S. residential property sales in January, down from 7.9 percent in December and down from 8.2 percent in January 2013. This was the biggest one month plunge in history. It gets worse: the January share of institutional investor purchases represented the lowest monthly level since March 2012 — a 22-month low.”
“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.