After the housing bubble burst there was sympathy for first-time
home-buyers who had been enticed in by the easy loans and rising
home prices and wound up in trouble.
But investors in single family homes came to be castigated as
'flippers', 'suckers', and worse. They had played a significant
role in creating the bubble, signing contracts, often on multiple
homes, making virtually no down payments, not intending to ever
live in or even rent out the homes, but to simply flip them for a
quick profit. Builders could hardly keep up with demand for a
while, but wound up with wastelands of partially completed
developments and condo projects, especially in the sun-belt
That 'investor' activity resulted in much of the subsequent
pile-up of defaulted mortgages, foreclosed properties, and record
high inventory of unsold homes that has had the housing industry in
a five-year depression.
But for the past year, real estate speculators and investors
have been playing a perhaps heroic role by diving back in on
expectation that the real estate market is bottoming.
They may even be single-handedly creating the conditions
themselves that have them optimistic.
Recent housing reports have been encouraging. Although home
sales stalled again in June, on average they've been rising for
most of the year. Home prices have been inching up. Foreclosures
are down fairly sharply. The inventory of unsold homes has dropped
dramatically. The recent employment report showed that homebuilders
added 5,800 workers in July. That's about the same number of
monthly hires they were adding during the bubble years of 2005 and
2006. (Of course, the big difference is that then they were adding
to already record high levels of construction employment, while now
they are hiring back from record levels of unemployment in the
The interesting and perhaps unnoticed aspect of all this is that
it is investors and speculators who have been providing much of the
activity for more than a year now.
An April report from the National Association of Realtors showed
that the number of owner-occupied homes fell 15.5% last year, while
the number of investor-owned homes surged 64.5%.
That situation has continued, with sales reports this year
showing that 20% to 25% of reported monthly sales of both new and
existing homes have been to bottom-fishing investors, swooping in
to buy at what they expect to be low prices.
The NAR reports that 41% of investment buyers bought more than
one property, nearly half say they intend to buy another property
within two years, and they intend to hold the properties for an
average of five years.
It has been working out well for them so far. Desire for
home-ownership, the age-old American dream, has plunged. Demand for
rentals is up, which has rental prices rising.
It's not yet clear whether speculators have got it right or have
gotten too optimistic too soon.
New home sales plunged a big 8.4% in June, while existing home
sales fell 5.4%.
Realtors say the stumble was only a one-month glitch and demand
But bears on the housing industry, who believe the bottom will
not be seen until 2014, point out that half of would-be traditional
home-buyers can't qualify for a mortgage even with rates at record
lows, and that the banks are sitting on a huge backlog of homes
with delinquent mortgages they will be foreclosing on, and dumping
on the market in coming quarters, sure to push prices into another
Another round of monthly housing reports begins next week, with
the release of the Housing Market Index, which measures the
optimism of the nation's home-builders, on Wednesday, Housing
Starts on Thursday, and new and existing home sales the following
Those will be important reports to keep an eye on, not just for
the housing industry, but for the overall economy.
The two main driving forces of the economy historically have
always been the housing and auto industries. That stands to reason
since they have long tentacles that provide employment for so many
peripheral suppliers and businesses that feed off whatever success
It has long been my opinion that it's a mistake to watch the
employment picture for signs of a recovery. Jobs are a lagging
indicator. Employers do not hire more workers until the economy has
already improved to the point where they can't handle their
increasing sales and activity without hiring more help.
The leading indicators for the economy (in both directions) are
housing and autos.
Auto sales have been picking up for more than a year now, which
has helped. But autos alone can't carry the entire load.
Apparently investors and speculators, providing more than 20% of
home purchases have at least prevented housing from sinking lower
that it would have, and may be creating a bottom that will
encourage more traditional buying.
Let's hope so. The latest housing reports beginning next week
should provide important evidence one way or the other.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Bernanke's Cross Of Gold