The Next Real Estate Bubble Is Already Underway
By JACK McCABE
WE ARE ON THE CUSP OF THE next great real estate boom-bust cycle, the second since the beginning of the millennia. This one could be worse than the bust of last decade that prefaced and caused the Great Recession.
What will we call this cycle? The Greater — or Greatest — Recession?
Six years after the most recent real estate bust began, three years since the supposed end of the Great Recession, residential real estate and stocks are once again becoming the choices du jour of investors big and small.
According to National Association of Realtors data and other indices, housing inventories are down everywhere, while transactions have surged to 2005 boom-time levels. Las Vegas, one of the hardest-hit markets during the bust, saw single-family home prices skyrocket by 37 percent in the last year. Prices have increased by more than 20 percent this year in San Francisco, Phoenix, Tampa, Orlando, South Florida, Sarasota and several other previously hard-hit markets.
The latest Case-Shiller index shows that existing single-family home prices have increased by 14 percent nationwide year over year.
So why this sudden pseudo-surge in prices in Florida, where real estate values crashed 40 percent to 60 percent since 2007? And what really is driving real estate values higher?
Before the boom began in 2002, residential real estate ownership was primarily the domain of the general public and individual investors. Families borrowed from banks and invested savings to own their own shelter, or small investors seeking steady rental cash flow income and the potential for increased profits through escalating market values operated small portfolios.
But since the last decade’s boom and bust, homeownership has radically changed.
As I’ve written in previous columns, hedge funds, private-equity groups, institutional investors and high-net-worth foreign investors have become the dominant buyers of residential real estate in America — significantly in Florida and other so-called sand states. Since the start of 2012, corporations have acquired a staggering 40 percent to more than 50 percent of available inventory in many key marketplaces.
Blackstone Group LP, the largest hedge fund involved in residential property acquisition for rental, already has acquired more than 30,000 homes for $4.5 billion in the last 15 months. In August, the firm announced a $2.7 billion investment in apartment complexes owned by GE Finance. It also has raised an additional $2.5 billion to make loans to smaller residential property operators with an “REO to rental” strategy.
Colony Capital LLC and Apollo Global Management LLC are other multibillion-dollar buyers of residential properties.
Also on an acquisition tear are Vulcan Investment Partners LLC and Delavaco Properties Inc. — funds headquartered in South Florida, although one’s investor’s are primarily Canadian while the other firm is flush with cash from South America. But there are hundreds of other firms with small and large war chests of capital for residential acquisition.
In 2007, the hedge funds and vulture buyers swooped in to scoop up tens of thousands of newly built condominiums in depressed markets in Florida, Arizona, Nevada and California, initially targeting large blocks or entire projects of foreclosed, bank-owned condominiums at bargain-basement prices discounted by 50 to 80 percent. Those properties have now bled into the rental inventory and are primarily occupied by renters.
At the same time, mortgage financing has been difficult if not impossible for average Americans to obtain. Appraisals also have stymied many purchases of existing homes due to stricter regulation and oversight. Even if you’re pre-approved for a mortgage and have the necessary down payment to pay full price for a home of your choice, the private-equity funds will pay whatever it takes and individual owner-occupiers, first-time buyers and veterans lose.
While the hedge funds initially bought lower-priced homes at bargain prices directly from banks or foreclosure auction websites, a paradigm shift has occurred since last year. Funds and high-net-worth investors are now buying Realtor listings. Our research has discovered thousands of sales to funds at 25 percent or more above current market values.
The funds are driving prices higher and artificially escalating values, a trend that in my opinion will continue for the next two to five years. Yet, as of the end of July, Florida still has 341,000 open foreclosure cases in state courts. More than 137,000, or 41 percent, are in Miami-Dade, Broward and Palm Beach counties.
About 550,000 Florida homeowners with a mortgage are 90 days or more delinquent in payments and subject to future foreclosure filing. More than 2,000 of those properties are in South Florida.
Approximately 28 percent of homeowners owe more than the current market value of their property. This ratio was as high as 48 percent in 2011.
Foreclosure and delinquency numbers are pretty much the same as at the end of 2011. Florida is still tops in the nation in foreclosures and distressed properties.
Here’s my prediction of what’s ahead:
Funds, private-equity groups and high-net-worth investors will continue to buy distressed bank- and Realtor-listed Multiple Listing Service properties until price points reach 2006 median levels.
Banks will ease qualifying criteria, not to last decade’s levels but to conservative lending formulas from the 1990s. Adjustable rate mortgages tied to Treasury bill and LIBOR rates will become increasingly prevalent. Mortgage interest rates will skyrocket by 2017. Funds will begin deploying exit strategies, including disposition of assets, a year before the rates head skyward.
Consumers will buy overpriced homes for the next two to five years using ARMs and other newfangled lending programs that increase homebuyers’ monthly costs as rates rise. Inventory will increase as funds move to sell their holdings. Homebuyers will have overpriced properties with increasing payments as inventory balloons and prices begin to decline.
Florida median household income has decreased by 12 percent since 2007.
It’s not the speculative, consumer-greed-driven cycle of the last decade. The drivers are faulty federal government housing policies, failing Federal Reserve policies and corporations’ and hedge funds’ strategy to inflate residential real estate to reap the rewards from last decade’s bust.
But the results will be the same — and could be worse.
There’s money to be made in the next few years. But timing, and knowing when to exit, will be key to developers, lenders and these corporate homeowners. In real estate, when the music stops and you’re left without a chair, you lose … big time.
Jack McCabe, CEO of McCabe Research & Consulting is an independent housing analyst, columnist, author, TV commentator and speaker.
