Hello Haim, on the domestic housing front, from wall street vantage, is below what you see?
Just in in-tray
The New and Improved Real Estate Investment Model
Ramsey Su June 2012
Direct ownership of single family dwellings and small apartments have never whetted the appetite of Wall Street. In fact, they were not even of interest to the big investors and were mainly left to local small potatoes. The primary reason is the lack of a convenient package large enough for them to make enough money off and far too cumbersome to manage. Furthermore, there were no mechanism for these properties to be leveraged, hypothecated and somehow be engineered into derivatives, the kind that serves no purpose except to fatten Wall Street's coffers.
Now things have changed.
The new and improved model is simple. Just like a subprime pool of loans, buy up as many properties as possible, put some lipstick on the pig (aka glossy brochures) and let Wall Street sell it as REITs. They can also securitize the income and voilà, a new round of derivatives is born. Once the fees are made and the syndicators collect their share of the profits, Wall Street can now prosper off the derivatives with no regards to the underlying properties.
In every major city, hundreds of bird dogs (aka real estate agents) are writing thousands of offers, hoping that some would stick. Most of these offers are robo-signed by designated officers who have never seen the property. Initial decisions are based purely by inserting numbers in boxes on a spread sheet (aka proprietary computer model), followed by some due diligence upon acceptance. No one knows exactly how many of these groups are active and how many properties have been accumulated so far. My guess is the pace is shockingly fast with many groups already holding thousands of properties. In the aggregate, there may be more than enough funds to gobble up every piece of property on the market, including all upcoming REOs and distressed loans.
In the next few months, there should be some news about how much these groups have assembled. Within the year, the REITs and other forms of securitized products should be hitting the market with regularity. Just like the early years of subprime, once these products gain acceptance by the same suckers who bought the subprime MBSs, Wall Street would be able to crank out these products month after month until the next bubble bursts.
This is a totally new phenomenon. It would take a little time to see how the dust settles. Upcoming data points may be confusing. For example, a significant number of sales are not going through the MLS today. NAR is a survey of realtors. The existing homes sales release next week in likely to grossly understate the actual number of sales. Furthermore, sales price may increase but they would not include all the cash deals done directly between lenders and bulk buyers. The recording based services such as Corelogic, DataQuick or LPS would have far better data. It is highly probable that we will see their numbers in contrast against the NAR's.
There are many other mixed signals. Personally, I have never invested when the market is in a feeding frenzy, with unlimited investor interests supported by so much funding. Yet, the prices are not going up at the rate that I would expect. As available inventory is being absorbed, there seems to be an endless amount in the pipeline.
Real estate investors need to understand prices cannot go up without the support of household balance sheets. Interest rates have been more and more accommodating while the effects are diminishing. Many renters are renting because of debt to income ratios, in spite of analysis that may justify buy vs rent. Instead of debt to income, investors should pay attention to rent to income ratios. That limits the ability not only to raise rents in the future but to keep existing tenants during the upcoming periods of hardship. The Feds had a timely release on this subject.
bloomberg.com
Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Housing
The most confusing signal remains the unpredictable interventions at all levels of government. Personally, I never expected the level of foreclosure prevention and other forms of disrespect of property rights as exhibited by our supposedly free market economy. Now there is little doubt when renters start to default on their rental agreements, landlords would be prevented from evicting tenants. What would be a better target than a bunch of evil Wall Street landlords who "stole" these properties at rock bottom prices in the first place, and now gouging poor tenants with usurious rents.
In summary, I believe the real estate market is once again sewing the seed for mass confusion in the near future. The global economy is driving down the standard of living of developed nations. It is highly possible that our society is simply living in "too much house". Is there a real demand for these rental houses? |
