Rumors of a Housing Recovery Have Been Greatly Exaggerated

foreclosure NV

The tail appears to be wagging the cart, and there’s probably a horse in there somewhere…


I’m working on a proper long-form article, but I thought I’d throw out a couple of brief observations to keep the ball in the air, as it were.  A little bit econ, a little bit politics, and a whole lot of existential pessimism.  Enjoy!  (ps: you probably won’t enjoy it, but you might at least find it informative.  I’ll keep my fingers crossed.)


So, I hear the housing market is back.  Which is to say, it’s coming back.  It didn’t tank quite as hard in my backyard as some places (My Mom lives near Las Vegas, and Yikes!), but even here it’s tough not to notice all the “For Sale” signs, or how quickly many of them are switching over to “Sold.”  There still aren’t many openings in the construction business, but that’s a whole other ball of trash.  At any rate, things appear to be improving for the class of investment that makes up the bulk of Middle-Class American wealth.

Of course, if you’re thinking this is good news for Middle-Class Americans, you might want to reconsider.

Upticks in Omaha may be a function of the usual market forces (lowered prices, return of cheap/available credit), but there’s a good reason to be skeptical of recoveries in harder-hit areas.  As it happens, there’s been a trend among Hedge Funds and Private Equity firms to move directly into various housing markets (the more depressed/demolished, the better).  It had a lot of people scratching their heads, and rightly so.  This from Reuters lays out all the cards:

“The once-beleaguered Las Vegas housing market has been on fire since investment firms led by Blackstone Group LP, Colony Capital and American Homes 4 Rent began buying homes here some eight months ago, backed by $8 billion in investor cash to spend nationally.

“These big investors and a handful of others have bought at least 55,000 single-family homes across the United States in the past year.  In the Vegas area alone, they have accounted for at least 10 percent of the homes sold since January 2012…”

The idea, I guess, was to buy up cheap homes through newly-formed subsidiaries and start renting them out to credit-impaired locals.  In classic Wall Street fashion, things got weird once everyone and their hamster got wind of the idea and copied it.

Anyone who’s ever been a landlord, or had one, understands that the job is nowhere near as simple in practice as it is on paper.  Condos and apartment buildings are one thing, but with stand-alone homes, there’s a lot more for owners to worry about.  Yard maintenance, plumbing/sewer issues, and upkeep of mechanical requirements like HVAC or kitchen appliances can come up unexpectedly and add up quickly.  Without a crew in place ahead of time, renovation and turnaround on vacant properties can take weeks, or even months, depending on the individual house.

On top of that, market distortions from that sudden injection of loose cash began to narrow the potential profit margins precipitously.  Home prices have shot up, more than 30% in some places, and as more and more properties come up for rent, the monthly rates our new “landlords” can charge are going to eat shit hard.  It didn’t take long for the great and powerful “financial innovators” to start rethinking the wisdom of their billion-dollar bets.  Again from Reuters:

“The combination of rising acquisition costs, prolonged rental lead times and declining rental income is disrupting the spread-sheet analysis behind Wall Street’s bet.  That could pose problems for what once seemed like a slam dunk. It could also give pause to stock-market investors as some players list their shares.  American Homes 4 Rent, based in Malibu, California, has said it expects to file soon for an initial public offering.”

Ah, the IPO, the closest thing a braindead investor has to a “Get Out of Jail Free” card.  An “Initial Public Offering” of stock can make it possible for Private Equity and Venture Capital investors to show a return on a business that hasn’t yet managed to make anything or sell it to anyone.  All they have to do is build up a little buzz and push through the paperwork before the market wises up and the whole façade crumbles.  These things were at the root of the Tech Bubble in the late 90’s, and since little in the way of effective new regulation materialized in response to that disaster (hat tip Bob Rubin), they’re looking like a popular option for today’s moneyed half-wit who wants to force someone else to eat the costs of his mistakes as well.

So, using the Vegas market as an example, let’s do a quick recap:

Wall St. banks use unregulated derivatives and highly unethical rating and accounting schemes to blow up a massive bubble in real estate value, then position themselves to profit from the inevitable collapse.  When said collapse is bigger than expected, they cajole and terrify the government into rescuing them from their own engineered disaster.  Next, they spend millions of those bailout dollars fighting the few, pathetic attempts by Washington to reign in their idiotic behavior.  The moment housing finally bottoms out, several of the same banks create local subsidiary companies and use them to snatch up hundreds of foreclosed properties at reduced prices.  The plan is to rent said houses to the same low-income families they’ve just crowded out of the market.  Finally, when this dubious plan starts turning against them, the banks do what they do best:  Cash out before things get ugly, and leave someone else holding the bag.

Is anyone else starting to see a pattern here?

I could absolutely keep going on this, but I think I’ve made my point.  Perceived value recoveries in the nation’s hardest-hit housing markets are more than likely just a temporary illusion, brought on by the same unchecked greed and stupidity that tanked them in the first place.  I understand how easy it is for the desperate and downtrodden residents of these areas to want to take anything close to good news at face value, but the reality, unfortunately, is a little more complicated.

These sort of short-term speculative events almost always do more damage than good for a market.  The vast majority of these new subsidiary businesses will close their doors and dump their inventories back on the market sooner or later.  In the mean time, they’ve artificially driven up prices, forced legitimate long-term buyers out, and their market distortions have lead to misallocation of capital and labor to (if you can believe it) start building more new houses at a time when there are already thousands of vacant ones lying around.

The sad truth is this:  A legitimate housing recovery can’t happen until unemployment levels off and real demand starts coming back, and even when it does, it’s going to be significantly more slow and painful than anyone would like it to be.

And given the current direction of both Federal and State policy, it could be a while before we even get that far.


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