Large institutional investors have been driving a lot of the U.S. home-buying and home price appreciation over the last five years. In the past two years, more than $20 billion has been spent by institutional investors, including hedge funds, real-estate investment trusts, private capital firms, and others, to purchase approximately 200,000 rental properties. They are often rewarded with handsome compensation, as well as note buyers, realtors and other professionals in the sector.
Many of these large investors have drastically reduced their purchases in recent years. Blackstone Group, for example, spent $100 million per week on properties last year. However, their pace of acquisitions has slowed by 70%. Blackstone is the U.S.’s largest single-family home landlord. However, the second and third largest single family landlords are both scaling back (source Bloomberg, March 14, 2014.). These large investors are likely becoming more nervous about the massive rise in home prices and are not seeing as many low-priced deals.
These investors have been, for better and for worse, a major part of the rise in real estate prices. Where are they likely to take them from now? They will likely continue to rise, but at a slower rate, or will they slow down, and home values could fall. Both sides have many experts. These arguments are used by those who believe home prices will fall at the end 2014:
- Fundamentals of the housing market are weak. The housing market fundamentals are weak. Income growth, unemployment, and general economic conditions are still not ideal. Existing home sales have been falling. California’s median-priced home is only affordable by one-third of its population.
- The interest rates are unlikely to go down, but they will likely rise. Mortgage payments rise as interest rates rise, which means that potential homeowners will be less likely to own a home.
- Young adults are more likely than other generations to have higher college loan debt and lower income growth. They will be less likely to purchase their first house if they are unable to afford it.
- The government has heavily supported the banking industry and maintained low interest rates to subsidize housing’s recovery. This can’t continue for much longer.
Experts on the opposing side of the argument anticipate home prices continuing to rise because:
- Housing market and economy are showing a lot of momentum. It is clear that there is a recovery underway.
- The government will remain a major player in the real-estate industry. If housing starts to slide, it is likely that they will quickly step in.
- Since banks are more sophisticated in how they lend money, the risk of a housing crash has been reduced.
What will the situation be on December 31? Personally, I’m more inclined to believe that prices will fall and agree with the first group. I don’t believe the economy is strong enough to support a long-term housing boom.
As I’ve said before, however, the most important variable is the U.S. government’s response. A fall is possible if they let market forces rule and refrain from interfering. If they get back into the fray, however, all bets are off. Which do you think will happen next?