How Healthy Can the Housing Market Be When Institutions Are Buying up to 70% of the Homes?

The co-principal of Title Capital Management LLC, a private real estate firm specializing in distressed properties in Florida, was recently quoted as saying, “I don’t know whether things are as good as they seem to be. A lot of properties are being occupied by institutional investors, not the end-user.” (Source: “Wall Street betting billion on single-family homes in distressed markets,” Washington Post April 21, 2013.)

Institutional investors are buying up homes at a very fast pace. In some Florida housing markets, purchases by institutional investors account for as much as 70% of all purchases.

It isn’t a hidden fact anymore; institutional investors have become major home buyers, and they are running toward the housing market because elsewhere, returns are not very attractive. Institutional investors are operating on the notion of buy homes, fix homes, and then rent homes out.

As I have been harping on about in these pages for some time now, for there to be a recovery in the U.S. housing market, first-time home buyers must be present in the market. Unfortunately, the March existing homes sales revealed some disturbing numbers about first-time home buyers. To say the least, they are shying away from the housing market. First-time home buyers accounted for just 30% of all the sales in March, compared to 33% in March of 2012—a decline of nine percent. (Source: National Association of Realtors, April 22, 2013.)

I beg to ask the question: why aren’t first-time home buyers running toward the housing market when the mortgage rates are so low compared to last year, and the home affordability index shows they are more than able to own a home?

The answer to this is very simple: millions of Americans are suffering financially, and I highly doubt buying a home is near the top of their priority list.

The real recovery in the U.S. housing market will occur once those who actually buy a house to live in it start buying more homes. Institutional investors buying a significant amount of homes could run into trouble ahead if demand from actual home buyers doesn’t improve.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in Profit Confidential, August 23, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

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