Housing recovery: the long and short of it
Lehman Brothers, the investment bank that tipped the first domino in the 2008 financial crisis, recently sold an American multi-family housing portfolio for $6.5 billion. No, this Lazarus has not been raised from the dead. Rather, it’s shaking off all remaining assets in an attempt to repay their gargantuan debts.
This news heralds confidence in the recovery. American housing investments after 2008 were the quintessential dog with fleas — investors sooner jumping into pork belly than apartments. This risk aversion came in the wake of what is now known as the big short.
Big banks bet against the housing market firm in the knowledge that it was bound to crumble. Confidence in housing’s ultimate demise was high. After all, the investors betting against it were the same ones who packaged and sold the toxic subprime mortgage bonds.
Now that it’s clear the market is recovering, investors are going for what the Economist has termed the big long.
Rather than toying with short-term derivatives based on mortgage-backed bonds (MBBs), investors are actually investing in houses. Yes, real brick and mortar structures that people live in.
Investment firms are rapidly growing huge portfolios of single-family residences (SFRs) and multi-family housing complexes. One firm estimates they have amassed some $6-8 billion to invest in tangible real estate assets.
20% of national home sales in October were to investors. In California, speculator purchases at trustee’s sales have been running around 1/3rd of sales – an easy source of property for national operators. Rents are higher than they have ever been in proportion to home prices and mortgage payments. This time, it appears that cashing in on real estate means going long and betting that we are becoming a nation of renters.
first tuesday insight
The current upward trend in real estate prices is primarily fueled by investor activity. Sometimes we call this speculation.
The idea of going long vs. shorting the market is romantic. Investors are getting back to basics, shoring up the remains of the market, building a sustainable future and all that. But is this really the case?
Here at first tuesday we are not necessarily convinced. What’s happening right now falls in line with typical investor mentality: buy low, sell high. Investors are piling in right now since prices are low and interest rates are even lower. The problem is, this investor influx drives up prices and prevents real, end users from entering the market.
Critics of derivatives speculation argue these instruments are inherently risky since their connection to the underlying asset is tenuous. Well, we would propose that speculators can buy actual property all day long, and they still do not have a connection to the underlying asset since they are not end users. They are operating from the 45th floor in New York, and these SFRs are all over the country.
It’s a different kind of speculation, but speculation nonetheless.
As for the big long, only time will tell. Substantial gains in employment over the long term will cause prices to rise organically as end-user demand returns to the market. Once this happens and the end users can afford to become owner-occupants again, these brick and mortar speculators will go right back to betting on MBBs and the derivatives thereof. Hot money is always hot money, built to hit and run.