Counterparties: Underwater and over-bought

May 2, 2013

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What’s driving the housing recovery? Earlier this week we got some bullish housing news from Case-Shiller: home prices rose in February at the fastest rate since 2006. Nationally, home prices were 9.3% higher than they were in February 2012, while prices in Atlanta, Detroit, Las Vegas, Phoenix, and San Francisco all rose more than 15%.

Those cities are in the five worst-off states in the nation when it comes to underwater mortgages, according to Fannie Mae: all of them have more than 30% of their mortgages worth more than the house in question. In Nevada, more than 50% of residential properties are underwater. And while serious delinquency rates are declining, they are still more than three times what is considered normal.

So what’s going on? One answer is that investors are snatching up homes. Blackstone is just one of a several Wall Street investors who believe that the recovery is real. Its global head of real estate told the LA Times that the key to recent price increases is that there weren’t enough homes built during the recession. That’s certainly the case in Phoenix, the subject of Susan Burfield’s recent Businessweek cover story. One economist describes the sprawling desert metropolis as “a lab where we’ve gotten to see the effects of a high foreclosure rate and high negative equity.”

A mid-March story in the LA Times described Blackstone’s strategy:

Blackstone and a handful of other firms believe prices fell too far in the hardest-hit markets. So they’re racing to buy up the bargains, rent them for short-term profit and hold them for long-term price appreciation. These firms say they’ve invented a new investment strategy that also serves the public good by fueling the housing recovery and sprucing up homes.

Today, some of the early purveyors of this strategy are already pulling out after realizing that it’s more expensive to be a landlord than they originally thought. Not only are returns on rents lower than expected, according to Reuters’ Matthew Goldstein, but the demand from investors for cheap houses has driven prices too far up for speculators.

But if investors stop buying homes, will real Americans be there to pick up the slack? Homeownership rates are now at the lowest they’ve been since 1995. According to Capital Economics, that statistic suggests that investors are “still the dominant force behind [the] housing rebound”. As a result, says Bill McBride, “This investor buying is making it very difficult for first time buyers to find a home, and this is probably keeping some potential buyers as renters – and maybe pushing up some buyers to higher price points just to buy.” – Shane Ferro

On to today’s links:

Earnings
Five reasons why this is the worst earnings report Facebook has ever issued – Christopher Mims

Offshoring
Latvia probably isn’t the next Cyprus, unless it is – Joseph Cotterill

LIEBOR
Strip clubs and ski weekends may have fueled the Libor scandal – WSJ

EU Mess
ECB cuts interest rates in Europe to 0.5%, a record low – Reuters
Why a rate cut in Europe won’t help - Simone Foxman

New Normal
Tom Friedman “manages to be both incomprehensible and incredibly offensive at the same time”  - Felix
Three charts showing how the workers of the world are screwed – Henry Blodget

Alpha
SAC Capital changes internal policies to make it more clear it doesn’t condone insider trading – DealBook
Downloadable Steve Cohen-as-Moby Dick desktop wallpaper – Vanity Fair
Activist investor asks UBS to drop its entire investment bank – WSJ

Disasters
Co-op apartment buildings do not legally qualify for FEMA aid - NYT

Day in the life
“Sensitive thugs, y’all need hugs” – Joris Luyendijk

Debates
Larry Summers and Glenn Hubbard do not agree on our economic future – Adam Davidson

Data Points
What’s your CEO-to-average worker pay ratio? – Bloomberg

And, of course, there are many more links at Counterparties.

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