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Wolf Richter: Housing Bubble II – But This Time It’s Different

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Yves here. Wolf’s article includes some information on how private equity investors are faring with their grand scheme to convert single family homes to rentals. We had raised the issue that the rent levels that had enticed them into the market were a function of scarce supply, and that once they started trying to rent up more properties, their very presence in the market would depress yields. That appears to be happening already, and to a more significant degree than even we cynics had anticipated.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

We have seen it for several years now: foreclosure sales—there were 5 million since the peak of the housing bubble—have become the hunting grounds for investors with two goals: hanging on to these homes until the Fed’s flood of money drives up their value; and defraying the expenses of ownership by renting them out. And funds have a third goal: collecting management fees. Thousands of smaller investors have piled into the game. And so have the giants.

Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg, to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work.

Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami. It had an impact. In the latest Case-Shiller report—a three-month moving average for October, November, and December—home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble. Las Vegas popped 12.9%, and Phoenix 23%. It’s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%.

“We recognized that prices were moving faster than people expected,” explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, they’re still “finding opportunities to buy.” They might not be able to rent them out very quickly, but they’d rather not be “missing out on a few points in home price appreciation.” The race to buy is on. The next housing bubble is inflating.

And that’s great. Money—which the Fed hands to its cronies at the frenetic pace of $85 billion a month—magically finds places to go and drives up values, and transactions take place, and paper gets shuffled around, and homes change hands as banks get out from under them, and fees and commissions change hands too. It inflates GDP, which is what everyone wants. And Chairman Bernanke can contort his arm slapping himself on the back.

Trying to rent these places is another story. Housing is zero-sum: when you move into a new place, you move out of the old place at the same time. So it becomes available. And someone else goes through the same process. Only household formation solves the problem of vacant homes—but that takes years or decades.

Best of all, these formerly foreclosed homes have now been pulled off the for-sale inventory list. Hence the “tight” inventory. And they’ve been transferred to the for-rent inventory list where they don’t bother anyone. Except the owners. Colony Capital, for example, with its 7,000 homes, has an occupancy rate of 53%.

Suddenly, the market for single-family rental homes—unlike apartments, which cater to different people—has turned into an elbow-to-elbow affair. The pressure on rents is huge. Year-over-year, rents edged up only 0.5% in Atlanta and dropped 1.7% in Las Vegas. For Phoenix, Bloomberg cited Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency: median rent per square foot rose 3% year-over-year in February 2011, and 1.5% in February 2012. But in February 2013, it fell 3%.

This tendency was confirmed by others. On the west side of Phoenix, where investors have concentrated their purchases of single-family homes, rents dropped by $100 a month last year—a stunning 10%!—according to James Breitenstein, CEO of Landsmith which has dumped most of its Phoenix properties. He is seeing similar pressures in Las Vegas and Atlanta. “There’s a whole bunch of rental supply that’s coming on that used to be sitting empty in bank portfolios,” he said.

Timing couldn’t be worse. Occupancy rates of single-family rental homes are already low— 53% for Colony Capital. But investors are buying ever more properties and flood the rental market with them. Just when the stream of people who’ve gotten kicked out of their foreclosed homes is tapering off. With rising costs and declining revenues, the rental part of the business model collapses.

As the Fed’s money is trying to find a place to go, prices may continue to rise. But with the economics to support these prices—namely rental revenues—giving way, the remaining reason to buy would be a singular hope: economically unsustainable price appreciation. The definition of a bubble. At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again.

Dallas Fed President Richard Fisher often warned about the nefarious effects of this flood of money. But he was shuffled off to “an out-of-the-way ballroom” at the CPAC, where Republicans struggled with the future, and drew barely two dozen people; yet he had a pungent message. Read…. The Fed’s Token Voice Of Reason: Megabanks Undermine Americans’ Faith In Democracy

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70 comments

  1. Gaylord

    I suggest there are other factors affecting the housing market — especially employment and wage levels. Continued high unemployment combined with downward pressure on wages (people doing more work for the same or less money, and fewer high paying jobs) make it harder for people to afford to buy or rent where they want or need to live. Higher energy costs make it more expensive to commute. Downgraded credit also limits many people’s finances. Underwater homeowners can’t move to where the better job markets are, because they can’t afford to sell at depressed value. Finally, health care costs are rapidly increasing, which puts pressure on family budgets to curtail spending on other basics. As Mr. Richter suggests, the banks and investors are propping up a severely compromised system, trying to squeeze more out of the middle class. Even with the artificial boosting of banks’ assets, there’s bound to be a breaking point…again.

    1. The Rage

      Health Care costs are rapidly decreasing. That was clearly a Bush era scam with Bushco and the Health Care industry.

      It just don’t go down like that.

      So called “high energy costs” are not that high.

      1. ohmyheck

        Oh really? Then please explain this fact. In 2002, I paid a premium of $276 per month, for 2 adults and 2 childen. My deductible was $2,500.

        In 2012, I paid $465 for the same, only with a $10,000 deductible.

        Yes, the adults aged, so their premiums went up. But that does not account for a 70% increase over 10 years, and a quadrupling of the deductible rate.

        1. Mary Pope-Handy

          Our insurance premiums have almost tripled in 10 years. It’s a financial killer. (They were in the low 400s and as of May will be almost $1200 per month for a high deductible plan with 10k family max per year.) Our insurance is going up 13% from last year to this newest figure in May.

        2. Bill Smith

          It’s even worse if you get older.

          When I was younger, single consumer, in 2002, I had Blue Shield – $3000 deductible, 20% copay for $70 a month.

          From what I can tell, for my older age when Affordable Health Care kicks in, its gonna be $600 a month(Bronze Plan), Almost a 10 bagger! Still a single consumer too!

          Then I think I still might turn 65 in another 7 years, so kinda worried about chart on the way there.

        3. fresno dan

          You bring up a great point. Not only are the costs of raising premiums not part of the inflation calulation:

          http://www.bls.gov/cpi/cpifact4.htm
          “Although medical insurance premiums are an important part of consumers’ medical spending, the direct pricing of health insurance policies is not included in the CPI. As explained below, BLS reassigns most of this spending to the other medical categories (such as Hospitals) that are paid for by insurance.”

          But the whole issue of deductables is conviently forgotten.
          BTW, are you getting better, more personal care?
          Ow, I hurt myself laughing…

      2. cwaltz

        Just a suspicion on my part but I suspect that part of the reason they can say costs have gone down is that insurance companies have changed the product. They’ve created a model that discourages use by using larger co pays and deductibles.

    2. reslez

      All this and attitudinal changes that deter household formation and homeownership.

      I live with my sister: a decade ago that would have been unusual and worthy of conversation at family parties. Now relatives nod sagely instead of asking when she’ll get her own place.

      I rent. No one asks when I’ll buy. I don’t explain to them how rotten the chain of title issues are, or the cesspool the housing market has become… they already know. A quarter have been foreclosed themselves.

      When my boomer parents downsized the family home, they bought a place with a MIL unit. It’s for when I lose my job and we have to move in with them.

      We believe in preparation…

  2. Dr Duh

    I have two questions.
    1. What is the most efficient way to bet against them?
    2. When this blows up, how are the taxpayers going to get stuck with the bill?

    1. rjs

      what they’re missing is how much of a black hole for capital an investment in single family homes is…everything from landscaping to siding, roofing, & gutters needs maintenance, and everything from appliances to hardware & carpeting eventualy need to be replaced…

      1. Ptup

        Right. This model makes no sense. Dreamed up by hedgies and VC kids who have no clue how much work and expense is involved in renting a single family home is. Like their education and upbringing ever exposed them to this world. Ask any mom and pop who have rented over the years. You get pretty good at plumbing, electrics, landscaping, and bargain shopping for materials and appliances when you’re in the business, and, I’ll bet, if you asked any small landlord over a drink how they made money over the last thirty years, it was probably capital appreciation, more than anything. Fergetabout the tenant stories and issues.

        There’s a reason apartment buildings are a better way to make money from rentals. Talk to any old RE guy.

      2. Bill Smith

        They built a big, new, rentier complex down the road from me. Also noticed from the new housing construction stats the past few years that lots of the new construction was in rentier complexes.

        From my own anecdotal observation of a rentier complex, there is at least the appearance that household formation has occurred here. It makes me wonder if these utility maximizers have developed a new preference for rentier complexes?

  3. Ian

    These private equity groups are being offered blocks of 5000 homes at a clip by Fannie/Freddie as I understand it. So these would be the properties with the most corrupted chains of title, missing documentation, fraudulent origination, etc. While I don’t have a problem with my home or mortgage, I am actually daydreaming at times during the day as to how I could right this wrong, get all these banks/title cos./servicers/r.e.cos. charged and jailed. This kind of stuff makes me embarassed to be an American.

    1. Yves Smith Post author

      No, that’s not true. The Fannie/Freddie bulk sales program has not gotten off the ground. Basically, two thing happened. The mere announcement of the program got so many PE guys salavating at the mouth that there was no need to do bulk sales to unload more inventory, they could move a ton of onesies.

      Second, the program did lurch forward inertially (you know how bureaucracies work) but PE guys were not interested due to the first para (they could pick up enough property with the GSEs merely opening up their traditional channels a bit more) and that they saw the program rules as too onerous.

  4. Ptup

    “At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again.”

    I wouldn’t be too sure of that. Why would these guys do that twice? Right now, their excel sheets tell them that the downside probably isn’t too bad, because, if they got in early enough, they’ll make some money on their self created bubble, at least. But, second time around, it would no longer be such a safe bet. Nope, we’re just watching an echo bubble, that will deflate soon, and the money will go off chasing yield elsewhere (maybe, if RE is still the desired market, a more logical place, like apartment buildings?), while the market finally finds equilibrium, and millions of homes will deteriorate, unless mom and pop jump in and become landlords, which has always happened on a much smaller level, or, hey, the prices drop to a sane level where the impoverished former middle class of America can buy them and actually live in them. I find it hard to believe that the money people will just continue bashing their heads against a wall trying to get blood out of this stone.

    1. AbyNormal

      “Why would these guys do that twice?”

      your forgetting their Golden Rule…

      Screw unto others before they screw unto you.

      1. Ptup

        No, their golden rule is to make scads of money. Going into a market that was just barely successful the first time, and, not all that profitable, is not following the golden rule.
        I’ll bet that their a lot of youngish men and women at hedge funds that are on the edge of their seats right now, hoping that they come in with some decent numbers with the money they were fronted by their bosses for this scheme. If they don’t, they’ll be out in the cold in a pretty lousy job market for their type. Nobody is stupid enough to make that mistake twice in that world.

  5. Thorstein

    It seems to me that in single-family housing, rents could fall 20% and landlords would still make money. In multi-family housing, a water leak causes a rent strike by the whole building. The landlord is under social pressure to perform, and even our sorry excuse for a “legal system” sometimes will respond to that social pressure.

    In single-family housing, however, the tenant faces the landlord alone. The landlord doesn’t have to fix the leak or the furnace or the electrical or mow the lawn or shovel the snow. Hell, maybe rents could fall 30% and Blackstone will still make money?

    1. Yves Smith Post author

      These guys were targeting only 9% yields, and that was assuming only 1 week of vacancy on average (as in only 2%!) Remember, I was sitting in on presentations last year with very excited PE guys. And on top of THAT, one institutional investor (who had seen the full pro formas) snorted that they wer projecting 5% annual rent increases, which he regarded as delusional with wages stagnant. So 20% below pro forma does not begin to work.

      Did you read the post? Rents have fallen 10% in some areas, and Colony (considered to be very savvy) has only 53% rented up!

      You are assuming they’ve reached stabilized yields. They haven’t. It is looking like what will turn out to be stablized yields for a lot of them will be cash flow negative.

      1. Thorstein

        Thanks, Yves! I guess I was indirectly asking for the valuations that fueled this scam.

    2. Ptup

      “In single-family housing, however, the tenant faces the landlord alone. The landlord doesn’t have to fix the leak or the furnace or the electrical or mow the lawn or shovel the snow.”

      Have you ever rented? Have you ever signed a lease. Those obligations are almost always mapped out in writing before the first month’s check is signed. So, as stated in this article, as the rental market tightens, which landlord will succeed getting reliable tenants, therefore succeed in this business? The landlord that offers services, or the ass who doesn’t and raises rent every year?
      My landlord hasn’t raised the rent in five years, and, he has told me over the second beer why – I give him zero grief, and I pay on the first of every month. And he damn well does a nice job mowing and plowing, too.

      1. lalaland

        Im not even on a lease anymore. 6 years in the same beautiful home and we pay and take great care of the property. I had my second kid here, now 4. The house is as beautiful and homey as any home owners house. Yes, i could get kicked out shall he decide to sell it or raise the rent significantly – but as I said – we are not even on a lease anymore – he just doesnt bother with us. We were about to buy and when we got our stuff in order homes were up significantly again to the point where we could not or did not want to pay. We are paying half of what new owners on the block are paying to own now. Nothing in life is certain. Not even if you “own”.

  6. TomDor

    Bottom line for rents – their is upward pressure on rent prices – not as part of a real market but, because people need a roof over their head….survival. Stagnant wages force people to give up more to survive…leaving little left over for other basics.
    If an individual could get into a house, rather than the investor, at the same price point and interest – all things being the same… the individual will pay less than he/she would pay the investor – the investor is looking to capture a profit, the individual is looking to survive.
    What the investor will do is defer maintenance and other essentials, pull his profit out – short term, and run away from the portfolio – leaving the actual housing stock in bad shape.

    Now, with the FED support, a situation is again set-up where the rent extractive – non-productive segment – (Financial Services) will reap gains while at the expense of our economy and we the people.

    Legal Gambling
    The gloom is fading from the real estate situation. More nibbles during the last few weeks than the last three years. If January brings us good rains, this next year will open the door to the sunshine – a case of rain bringing the sun.
    It is to be hoped, however, that there will never be another boom. The crash of the boom of 1923 was due to the same causes that wrecked the wall street stock market. People sold what they did not own. They made a payment down in the hope of getting the property off their hands before it began to burn. Real estate fell into the hands of sharp-shooting gamblers who had no interest in land. To them it was just a pile of blue chips on a roulette wheel.

    1. R Foreman

      > Bottom line for rents – their is upward pressure on rent prices

      Bottom line for rents – their is downward pressure on rent prices ..there I fixed that for ya

      1. lalaland

        not in my town. rents are significantly up and home prices are at 2006 levels, several offers before homes go to MLS in the 800-1M range for a 700sq ft – 2/3 1500 sq ft. Laguna Beach, Orange County california.

  7. Mike

    I don’t believe housing is a zero-sum game. If people are shacked up together, either living with their parents/adult children or taking in roommates into the spare bedroom/basement/office, once those inhabitants move out, there is not necessarily a vacant space from where they moved from.

    1. Klassy!

      He addresses that:
      ” Only household formation solves the problem of vacant homes—but that takes years or decades.”
      Years and decades is correct in the absence of an improving economy.

      1. Justicia

        Household formation! Ha, ha. Tell that to the college grads trying to pay off mountains of student debt on servant industry wages — or non-existant wages from internships.

  8. Casteelk

    Where I live, there are loads of families selling their house, and many people I know personally. Its not because they are losing there job, per se, its because everyone is scrapping by layoffs, and everyone believes its just a matter of time, so many are off loading their homes, moving to rentals and preparing for job layoffs and the probability of having to move on short notice. Its becoming a trend, I myself am considering, but I like my house.

  9. Devin

    I’m curious about how this applies to NYC.

    Here, the vacancy rate is about 2% and rental rates have been mostly stagnant over the past 6 months. In “hot” submarkets in Brooklyn and Queens housing prices have gone up 50% in the past 12 months. Buying is frenzied — properties are sitting on the market for less than a week- or even less than a day– in large swaths of brooklyn, queens and manhattan. PE funds are buying up foreclosures and even debt on distressed rent stabilized properties. (see http://thesurrealestate.org/tag/stabilis-fund-ii/).

    This last point is particularly interesting because these properties, by law, cannot produce high returns.

    We have several fundamentals that are worth taking into account too — and which make the city not-quite-zero-sum. Unlike other markets, foreign investors buy trophy properties in Manhattan (and possibly Williamsburg now) that drive up prices and send middle class residents to the outer boroughs.In turn they displace working class residents in the outer boroughs, but that’s where the zero-sum stops. The economic recovery here has replaced many of the middle class jobs with low-wage service sector jobs. As a result, poor renters are moving out of gentrifying neighborhoods in queens and brooklyn and living in modified basements or shared rooms at the edge of the outer boroughs (East NY, Jamaica, the Bronx). This type of move creates vacancies in one neighborhood, but does not drive up demand in another, because multiple families are sharing an apartment.

    I’m not an economist. Just a curious New Yorker who can’t believe how much it costs to buy a home here. And who really can’t believe that housing prices went up 50% in a year in many neighborhoods.

    1. Ptup

      It doesn’t. NYC rents kept on going up all through this last “recession”. It is not a normal place, along with SanFrancisco. All that, and, also, it’s one of the few places in America with rent controls. A very screwed up market.
      NYC is an international trophy city, in the same league as Paris, Hong Kong, SF, South Beach, London, and a few others. You’re competing with the richest from all over the world. Also, as long as the financial industry downtown is propped up by the Fed and your tax dollars, forget about finding an affordable place to live. Oh, and, lets not forget that it’s an island, too.

  10. LillithMc

    Sacramento has been greatly affected by the mortgage mess. Underwater for six years. Newer home subdivisions were recently bought up by pots of investor money creating a small increase in value. Now they seem to have stopped buying and the market has almost no inventory. Being underwater traps the home owners who have survived. Rentals remain high and not easy for the ex-home owners who have credit problems from the short sales.

  11. Rehabber

    This PE entrance into the SFH rental mkt is bound to fail because of 1 reason: fragmentation. The operation of SFHs does not aggregate like apts or commercial RE. Finding good tenants takes work and is very hands on, and we provide incentives such as multi-year, reduced rental rates to keep good tenants in place. Tenant turnover is a killer in this business. In Atlanta, the PE agents are buying agressively on the courthouse steps. They walk around with rolls of cashiers checks. And their job is fill out inventory demands, they don’t make assessments of particular neighborhoods, and end up overpaying by $10-15K on a regulary basis. The agent does not care b/c at the end of the day, it’s not his money that he’s spending, so the fact that the extra $15k kills the return does not matter. From a make-ready standpoint, I find it hard to believe that they can effectively renovate and turn a large number of houses out at the smae time – managing that many crews has to be a logistical and human resource nightmare. And I doubt the big benefit of ownership as an individual – taxes – translates into the corporate form. They will screw this up, start dumping the homes when it gets too tough, and small investors will come back through and clean the mess up in another 5 years.

  12. Another investor

    I’m one of those small investors who has been acquiring properties in Atlanta, Houston and Austin. One thing the article has left out is that Colony has 53% vacancy rate because of increase is rate of acquisitions.

    The properties that we buy has considerable works to be done in order to get them rented and there is definitely a bottleneck in sourcing good quality/reasonably priced contractors. For example, we’ve spent more than 2 months for two of our properties in repairs and the inability to find contractors (backlog) was the primary reason. This problem is probably heightened w folks at Colony because of their bulk purchase method.

    If read the research paper by Oliver Chang, he factors is larger vacancy rate. It was much larger than 1 week.

    I think someone above mentioned that he’d like to short this “bubble.” I’ll take the other side any day.

    1. Ptup

      Even after all of what you just described? Sounds like you barely even have a cash flow yet. Why the optimism? Do you think Colony is going to fill all of those empties overnight, and that empty capacity vanishes?

      btw, How are you going to find contractors for ongoing maintenance, if you’re having difficulties now?

      1. Another investor

        We have 86% occupancy. We’ve been cash positive since third month of operation.

        Maintenance and initial works to get the properties rented for the first time after being vacant for 2 years are two very different works.

    2. TomDor

      “bottleneck in sourcing good quality/reasonably priced contractors.”

      I would have to say – what is a reasonably priced contractor to you? – LOL
      Is it someone who does good work but, can’t pay the rental your putting together on what you want to pay him.
      If you have not noticed – there are a huge number of contractors out in the world looking for a job. I suppose you want to pay them minimum wage or less – like undocumented labor that you will pay less than minimum.

      Hey, mexicans do work that Americans won’t do….. is that your operation? – You give proper pay for a contractor and you will not find a shortage of quality workers….also, by paying well…you will not make your profit….LOL on your problems AnotherInvestor…dweeb

      1. Lambert Strether

        I think by “reasonably priced” it’s meant “would willingly pay for the privilege of working” in the hope of making it up with some future client. Hey, maybe we can start bringing contractors in on H1B visas!

        1. Another investor

          Cool- You’ve made me delusional and fraudulent with one post. I’m sure I know both single family resident and multi-family complexes better than you do, pal.

          1. skippy

            Hint… investing in cracker boxes that have a self life, the downward ramp of builder liability – warranty’s (about 12 years in the US) is a mugs game. Everything comes down to the years already on a house – unit and the increasing age as it implodes. This does not even touch the changing social demographic of suburban incomes, increases in all counsel rates ie land – utility’s, etc.

            Skippy… housing – units is a long term investment as you know… temp workers – part time wage risk is hard to pin down… eh. Good luck anyway…

      2. TomDor

        Don’t forget, while your doing investment to turn a property for rental.
        You get your contractor to do ‘quality work’ and you fail to pull a permit and inspection for work done…..lets say that some electrical work was done..a bad outlet or some plumbing…that never got listed as work…lets say your contractor does it as a favor to impress upon you the good work……what is to prevent you from getting liability for …lets say the house going down and injuries cause you cut corners or did not go through the proper code work. – Your looking at a risk that is not covered – it on you, so beyond quality work, you need work performed by a qualified individual. Can’t tell you how many times I have seen ‘quality work’ performed by an unqualified individual resulting in loss of life. We have not even touched ongoing costs of up-keep. – So, go ahead, at your own peril, in finding your ‘quality work at a “good price” self delusion. Oh – I would love to do an inspection and cost to rent analysis – including proper code and filings with the authority – but it will cost ya but, it is insured work!!

        You do know how much damage a house can sustain when unoccupied – even for a matter of months? You do realize that some people will rent from you – first checking work on property at authority – township or county seat – and set you up for a law suit (yes it is fraud) but you will have to be the defendant in damages and the litigant in proving fraud — that leaves you open to all sorts of headache that an apartment building does not….seperate areas of commons from private.

      3. Ms G

        @LS.

        Maybe its time to start the Reverse-NAFTA-Maneuver. Move to, and become citizen of, India. Apply for H1B visa to work in US via sponsorship by owner of US body-shop specializing in staffing big government IT contracts for prime contractors (e.g. SAIC). Sell organ to raise airfare – one way ticket to USA, land, start working for $15/hr while sponsor bills you at $125 and spend following year paying sponsor for “visa regularization” ($5,000). Then start path to American Dream: Apply for Green Card, then permanent residence, etc.

        [Somewhere in there, change name before returning to U.S. as H1B visa person.]

      4. Another investor

        I’m giving you the other side of argument.

        This was my first time posting on this board. You’ve proven that it’s not worth my time. Thank you.

        1. Chris Engel

          You’ve already disclosed that you have a vested financial agenda on this topic, so your ability to rationally and objectively discuss the nuances is highly suspect.

          We get it, you want to comment on this site to promote your bullish view of housing in the US, that’s fine.

          But there’s no shortage of availability of reasonably priced construction workers/contractors.

          There’s a shortage of integrity and willingness amongst capital-owners to actually pay a decent wage and eat the readjustments underway in the economy.

          That’s why it’s easier to just take advantage of the short-attention span of Westerners and hustle them with the same game they fell for in the climax of the crisis.

          The very hustlers who went bankrupt in 2006, 2007, 2008 in housing in the US are just now passing the 7-year mark for credit history cleansing.

          And now they’re back to the same old game, trying the same tactics to create a new bubble, since that’s all they know.

          Adding true value to the economy is too arduous a task and requires creativity and flexibility.

          Much easier to just hustle hustle hustle in the ZIRP speculation economy.

          So for the likes of real estate hustlers nationwide, there is no other option. This is all they know. An honest day’s work is a very foreign concept. And warped monetary/fiscal policy is only feeding the beast.

    3. Kurt Sperry

      There is almost never a shortage of labor–even skilled labor, just as there is almost never a shortage of house buyers or renters. What looks like a shortage is inevitably just unrealistic expectations running headlong into reality. Those terms are just a means of offshoring blame for that unrealism. Labor will always be available at a fair rate, just as buyers and renters will always be available at a fair price.

        1. Harrumph

          Jesus, have any of you ever tried to replace a roof on your own house? I went through six contractors and two months before I found one who wasn’t a jabbering dipshit or ran a cowboy operation. And he STILL managed to screw up the gutters.

          I’m no expert and no investor in SFH, but I live in Chicago and had the pick of a huge metro area. And they all sucked and took forever. So when someone says vacancy is related to shortages in contractor labor, I remember my roof last year and nod.

  13. kayjay

    Remarks limited to SFO-LA-San Diego and NYC:

    For climate reasons, I have been looking to purchase ~50 miles north (not south) of SFO for almost three years. The prices there have skyrocketed ~35% in about the last 18 months, ie, ~ 100-120K. Foreclosures/short sales are purchased by small and/or large pools, barely fixed up and put on the market for more than 100K plus. Someone is buying those houses from the reptiles– days on the market are very low;; I can’t afford those prices. Rentals are expensive and few and far between in this area. So, what does that say about renting out?

    California’s unemployment official unemployment rate is 9.8% and the incomes in this area are stagnant; yet the houses are selling! So, Bernanke has succeeded, right? My intuition tells me that this speculative cycle has sea legs, yet, a limited time span.

    I think that in this global economy and click of a button movement of money, this speculative cycle could go on for a long time. The Euro crisis has lasted way beyond my expectation!

    The cheap dollar which invites Canadian, Australian and scared Chinese and Latin-America money is piling on. Cheap/ easy money to buyers and investors is helping; Europe is dead and the saving pools there are humongous. In Coastal California and NYC-Boston areas this baby is not going to burst given the stock market which serves as its principal guiding light. The rest of the country will probably go to hell, not that Bernanke-Krugman-Woodford care.

    RE speculation seems stock market driven and supported — mirror images or Bernanke’s wealth effect. Only when the stock market cracks will we see some semblance of temporary rationality in this hyper-capitalist global economy chasing after easy and fast profit. The banks and or the Fannies would have to be rescued again. Q: What will Bernanke or his replacement do then? Pour more fuel on the fire?

    1. jan stickle

      Totally agree re: my area of northern CA coastal market. Homes selling for asking price and staying on market short time only. Smaller individual investors desperately looking for cash flow and very leery of leaving money in banks. Rental market here is not tight, but staying even over the year so far. Many of the homes selling need extensive work, yet are still selling with the hope that rents will produce some cash flow while appreciating in the latest bubble so they can be unloaded at a profit short term. Have looked at many properties and bought none because of upgrade/repair costs and fear of bubble implosion. If you are going to rent do this: 1) do credit report on tenant and 2) require copies of CA DMV printout as that will tell you pretty much all you need to know about tenant along with the standard references and employment history. Also (in this area) definite clause in lease prohibiting ANY pot grows, regardless of “legality” of Prop 215 medical marijuana permits. Also notice a new twist — buy land with run down house or mobile/MFG home and put in a newer large travel tailer and rent that out as well. Still looking and still very nervous.

      1. Omerine

        I am in North Orange County, CA. I bought a short sale in 2011 for $560k. Six months ago, homes in my neighborhood began to list and were selling in the range of High $600k to mid $700k. Today, there are 3 listed on my block. Two were listed in the $800k range and went into escrow within 2 weeks. I have a friend who is a seasoned realtor. She says market is hot, multiple offers, fast sales. She had four homes go into escrow yesterday, another today. It feels to both of us like the recent bubble all over again. It’s kind of scary and I am considering whether to sell again, pocket the cash, and wait it out.

        1. Ms G

          On behalf of the sub-group of the 99.9% who remain renters at the mercy of inflated rents, I would like to offer our congratulations for your successful speculation in real estate and our very best wishes for a profitable flip sale.

          1. Omerine

            I rented for a while, saved for a down payment and found a bank that worked with me on that short sale. I got lucky. I am not a “speculator”. On the contrary, I am only about 7 years out from the time I hope to retire and that is part of my concern here. I posted my experience since the discussion was the housing market and how prices are beginning to heat up in a way that “feels” very similar to the most and very recent bubble. There is the same kind of frenzy, multiple offers over list, fast turnaround following listing. The prices I indicated are real, as I said, a little scary to be happening this close to the last collapse and meant to illustrate the levels by which they are climbing. But I don’t think what I wrote warranted snark and doubt I’ll post again in future.

  14. dlk

    Yves, this frequent reader requests that you keep discussion in the comments section civil.

    The guy using the name “another investor” put up a contrary view to the author’s based on personal experience. His tone was neither hyperbolic nor vitriolic, but the response to his post was indignant and extreme. This isn’t conducive to learning.

    A lot of bright people think Bernanke is doing the right thing. Krugman and Dean Baker are included in this group. Dick Fisher has been wrong time and again in his forecasts and predictions. He did not forecast the housing bubble correctly. He has been for austerity and relatively tight money since the crash.

    I don’t have an opinion about Colony and Blackstone per se; I don’t love the strategy of buying and renting homes where land is not scarce and there aren’t many employers; but my guess is that if the Fed keeps up QE through mid 2015, it will go some way towards making up for weakness in other places in the world and for the coming austerity measures.

    1. skippy

      I think the point being is…. this is about existing stock and the increase in price is – just – investor driven, not a reflection of broader public demand, all in light of the shadow inventory.

      The last time around the unsophisticated were lured into the market by fraudulent mortgage origination which was enabled from the very highest offices on Wall st. With out the fraud the bubble would have deflated or exploded sooner, so the question begging is what drives this event[?] general public demand or a small investor bunch with mobs like blackstone and colony leading the charge… as they bid each other up.

      Skippy… at the end of the day it all boils down to… is it organic demand or just some speculators and who started the ball rolling. FYI if wages are flat or worse… what are the long term prospects for such an investment when the liability side is so wide as time moves forward.

    2. They didn't leave me a choice

      I agree with this, though on a different basis than dlk.

      1) It’s a good idea to not drive contrarians out, since even the delusional ones can provide occassional insight.

      2) Even if his only purpose was opinion management, it’s a good thing to hear the arguments these people are making, even if only to device ways of shooting them down.

    3. Lambert Strether

      Massive disemployment and plenty of trades scratching and the guy can’t find “reasonably priced” labor? I’ve not got a lot of patience with that perspective.

      To put this another way, that view is deeply insulting to those out of work — who are often asked to work for free to market or “prove” themselves. So, “hyperbolic” depends where you’re sitting, doesn’t it?

      1. Thisson

        I happen to agree with DLK’s observation. The responses to “Another Investor” were less than civil.

        Moreover, what is so objectionable about his opinion that the labor available isn’t reasonably priced? It is no more objectionable than the opinion that housing itself isn’t reasonably priced — which is precisely the premise of this article!! To attack him on this basis, suggesting he wants to hire illegal workers, etc is completely unwarranted. As a market participant, he is well within his rights to refrain from purchasing a service he believes is too expensive.

  15. wall street sucks

    the criminals keep getting rich, only this time they won’t get as rich, blackstone and colony can only go so far w/this bubble. Home buyers aren’t going to buy if prices go much higher, they’ll wait, and again, home prices will drop. The rentals they can’t rent will be dumped onto the market, and again, prices will drop. Drop back down to what they were 6 months ago. The demand isn’t organic and again, manipulated, and again going to crash, sooner rather than later this time with much less pop. Sell now if you have good equity and need the cash, b/c I don’t think prices will stay inflated too long.

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