Over the past five years, much of the home buying and propping up of home prices in the U.S. has been driven by large institutional investors. Hedge funds, real estate investment trusts, private equity firms, and similar institutional investors have spent more than $20 billion in just the last two years to buy about 200,000 rental homes. These investors, sometimes along with note buyers, realtors, and others in the industry, have been handsomely rewarded for their efforts.
However, many of these large investors have significantly scaled back purchases as of late. For example, Blackstone Group was spending $100 million a week on properties last year, but their pace of acquisitions has slowed down by about 70% since then. Blackstone is the largest U.S. single-family home landlord, though the second and third largest single-family landlords are also scaling back (source: Bloomberg, March 14, 2014). These big investors are seeing fewer low-priced deals and are probably getting nervous about the huge uptick in home prices.
Since these investors have, for better or for worse, been a big part of the increase in real estate prices, where are those prices likely to go from here? Will they continue their upward trajectory, albeit at a slower pace, or should we expect home values to come down? There are lots of experts on both sides of this argument. Those who believe that home prices will be lower at the end of 2014 have these arguments:
- The housing market fundamentals are weak. Unemployment, income growth, and even general economic condition are still less than ideal, and existing home sales have been declining. In California, only one-third of the population can afford a median-priced home.
- Interest rates won’t go lower, and are likely to actually swing upward. As rates go higher, mortgage payments increase, which translates to fewer people being potential homeowners.
- Young adults are likelier than previous generations to have high debts from college loans and weaker income growth. If they cannot afford to buy their first houses, then that will limit overall demand.
- Government has largely subsidized housing’s recovery by maintaining low interest rates, buying mortgage bonds, and heavily supporting the bank industry. This cannot last much longer.
Experts on the other side of the argument expect home prices to continue their ascent because:
- The housing market and economy have a lot of momentum, and the sense is that a recovery is under way
- The government will continue to be a big player in the real estate industry and is likely to step in quickly if housing begins to slide.
- The risk factors for a housing crash have been minimized since banks have become smarter about how they lend money.
Where will things stand this December 31? Personally, I am more inclined to go with the first group in thinking that there will be a decline in prices. I just don’t think that the economy has a strong enough foundation to support a longer housing boom.
That said and as I have often stated before, the biggest variable is how the U.S. government responds. If they allow market forces to rule and step back from interfering, some sort of a fall is probable. However, if they step back in to the fray, all bets are off. What do you think will happen?