A New and Different Housing Bubble is Emerging

Large Blocks of Homes Selling to Investors….

We have seen it for several years now: foreclosure sales have become the hunting grounds for investors with two goals…  hanging onto these homes until the Fed's flood of money drives up their value, and defraying the expenses of ownership by renting them out.   Thousands of smaller investors have piled into the game. And now so have the giants.

Blackstone Group LP, the world's largest private equity firm, plowed over $3.5 billion into the housing market 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 the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work as well and it had an impact. Home values soared 9.9% in Atlanta, Las Vegas 12.9%, and Phoenix 23% .  For San Diego home values… we have seen an increase of almost 24% over last year!

And that's great – money magically finds places to go and drives up home values, transactions take place, homes change hands as banks get out from under them, and commissions change too. Most importantly, this inflates GDP, which is what everyone wants. 

However…. on a national level…. the big investors trying to rent these homes is another story. Housing is a zero sum, meaning that when you move into a new place, you move out of the old place at the same time making it available, and then someone else goes through the same process. Colony Capital, for example, only has a 53% occupancy rate.   In San Diego, however, we haven't seen the large investment in homes turning to rentals…. and our rental vacancy rate is at 4.2%…. very low.

Yet, since we are tied to the national economy…. it is possible that with rising costs and declining revenues, the rental part of the business model may be collapsing. 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 giving away (mainly rentals), the remaining reason to buy the large blocks of homes would be the hope for economically unsustainable price appreciation – the definition of a bubble. At some point, not being able to make money on rentals, investors will bail out and then the process of a Fed-inspired housing bubble starts blowing up all over other parts of the country…. would it affect San Diego?

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