Recent reports on U.S. housing show a market enjoying a robust recovery, one strong enough to generate fears of another bubble. On the flip side, a conventional critique is the housing market is being driven largely by institutional investors vs. private buyers, as cited here yesterday by The Guardian’s Heidi Moore and today in NYT’s Dealbook.
In other words, the recovery is illusory and another consequence of the Fed's easy money policies, which favor Wall Street speculators vs. Main Street America.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, addresses both concerns in the accompanying video.
To the idea the housing market is being driven largely by institutional investors vs. private buyers, the economist has a counterintuitive response: “I’m hasty to be dismissive of the investors,” Shepherdson says. “They got the market going and I’m grateful for them.”
Similarly, he turns worries that about one-third of home sales are cash purchases on its head: “If one-third [of buyers] are investors, that means they’re outnumbered 2-to-1 by private buyers,” he says. “Given how high the unemployment rate is, that’s not so bad [and] I would guess as we get into next year the proportion of investors will decline…creating more space for private buyers.”
That’s assuming they have a job and can get a loan, of course.
Shepherdson also notes that other countries with long-term, healthy housing markets have typically had much higher rates of investor activity vs. the U.S. in recent years. “So you could argue this is a normalization of U.S. market by international standards,” he says.
Whether Americans want a housing market with an international flair is another story, but most would surely agree another bubble is best avoided at all costs.
“The last thing the U.S. needs is another crazy house price boom,” says Shepherdson.
Fortunately, that’s unlikely to occur, he says, predicting the recent uptick in prices will bring on more supply of homes previously underwater or merely kept off the market until the sales environment improved.
That time appears to have arrived: The most recent S&P/Case-Shiller house-price index, released last week, was up 10.9% from a year earlier and had its the largest monthly gain since April 2006. Existing-home sales have been higher than year-ago levels for 22 straight months and recently reached the highest monthly level since government home-buyer tax incentives expired in November 2009.
“The whole dynamic [for housing] has changed in a way that’s very positive,” Shepherson says. A combination of tight inventories and restraint by homebuilders has led to solid price appreciation, which in turn is pulling in new buyers. “Nobody wants to borrow money to buy a depreciating asset but everybody wants to borrow money to buy an appreciating asset,” he says.
Shepherson predicts the pace of price appreciation will slow into the 4% to 6% range in the second half of 2013 vs. 8%-10% in recent months, noting a slight uptick in inventory of existing homes for sale as previously reticent (or underwater) sellers put their homes on the market.
“I welcome that supply,” says Shepherdson. “I’m just happy it hasn’t happened so far – that wall of supply in a short period of time could’ve killed the whole [recovery] overnight.”
And, for the record, many of the same people currently decrying the housing recovery as "investor only" or "fake" are the same folks who predicted a "shadow inventory" of homes. If true, these properties would've come on the market long ago and snuffed out any rebound, which is very real judging by the numbers.