According to the S&P/CaseShiller index, property values rose 6.8% between December 2011 and December 2012. This was not surprising to anyone. Phoenix was the leader of this group, with 19 of 20 cities seeing value increases. This resulted in Phoenix gaining 23% during that 12-month period. The trend has been welcomed by note buyers and real estate investors. Economists and media see bright futures for housing, and believe that real property will bring the economy higher. Some investors and note buyers are skeptical about the authenticity of the housing recovery. One example of well-founded doubt is that Georgia, which has one of the highest foreclosure rates in the country, still saw a 5% increase in annual prices (per Salon, 2/7/2013).
We find that the traditional homebuyer is participating in this home-buying spree is less than it was in the past. Instead, Wall Street hedge funds and private equity firms are purchasing a lot more foreclosed properties and renting them out, which in turn fuels the rise in property values. Wall Street was able to survive the massive housing bubble they created a few years back and is now looking for new profits from this latest bubble.
REO-to rental is a hot trend in financial services. This involves raising large amounts of capital to purchase distressed properties, rent them out and then resell them at appreciation prices. According to a JP Morgan Chase report, REO-to rental has raised at least $10 million. This is enough to purchase 15% of all bank-owned properties. To entice investors, financial institutions offer 10% returns. Blackstone Group is spending $1 billion in Tampa, Florida alone for foreclosed houses (New Republic, 02/12/2013).
These firms often partner with large property management agencies that only do minor renovations to damaged properties. They have little interest in maintaining rents affordable and tenants happy. Experian, a credit-reporting company, has signed at least one agreement with these firms to provide faster credit reporting on renters. Worst, Wall Street is now exploring the possibility of securitizing rental income, just like they did mortgages. We all know what happened! Increasing speculation in the market is almost certain to lead to another bubble.
How can we tell when the housing bubble is about burst? The sheer size of these hedge funds and private equity firms will make it difficult for individuals to exit the market when they decide to do so. Any economic hiccup that could lead to more job losses or a decrease in home values will send these companies running for the exits, a metaphor that is very appropriate. Phoenix is an excellent candidate to watch what happens. Its home values have experienced a dramatic rise, a terrifying fall, and a great climb again. Some investors have already left that market.
Keep an eye out for financial institutions. They may also use alias names so an increase in inventory could indicate problems. Expect another crash soon after they decide to jump ship.