Investment Contrarians

How Investment Firms Might Be Squeezing out Homebuyers

By for Investment Contrarians |

How Investment Firms MightInvestors were pretty excited last week when it was announced that both existing- and new-home builds were up quarter-over-quarter and year-over-year.

U.S. builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000, up 3.6% over September and the highest rate since July 2008. New housing starts are also 87.0% above the annual rate of 478,000 in April 2009, the recession low. (Source: “US new home starts jump to fastest pace in 4 years,” Bloomberg Businessweek, November 20, 2012.)

Keep in mind, new-home sales only account for 20% of the housing market sales. So how did existing-home sales do?

In October, sales of existing homes, which investors tend to love, increased 2.1% month-over-month to a seasonally adjusted annual rate of 4.8 million. Existing-home sales are up 10.9% from a year earlier, representing the 16th consecutive month of year-over-year home-sales gains. (Source: “Existing-Home Sales Rise in October with Ongoing Price and Equity Gains,” National Association of Realtors, November 19, 2012.)

All evidence suggests the housing market recovery is in full swing! But not so fast—a recovery of some sort is in the oven; I’m just not sure it will benefit those who want to own a home.

In October, the median existing-home price was up 11.1% year-over-year at $178,000, marking the eighth consecutive monthly year-over-year increase. This is bad news for potential first-time homebuyers who face stricter lending rules from tight-fisted banks. And the cracks are beginning to show. First-time homebuyers accounted for just 31.0% of October purchases, down from 32.0% in September and 34.0% a year earlier.

While the number of existing homes on the market has increased for 16 consecutive months, the number of first-time buyers has been decreasing. Interestingly, all-cash sales (again, a favorite for investors) made up 29.0% of all transactions in October, a slight increase from 28.0% in September.

If you look at the numbers, it’s all pretty innocuous. Some first-time homeowners are getting a foot on the property ladder, some are downsizing, and some are investing. Everyone is taking an equal piece of the pie…maybe; but probably not.

While the Federal Reserve estimates that investors make up about 25% of home sales, this number is sorely conservative. After all, bulk sales to investors by banks and auction sales typically do not involve realtors and are not factored into monthly statistics.

Case in point: a number of private equity funds are jumping into the housing market and paying cash for foreclosed homes to turn them into rentals. With the number of available homes on the market decreasing and costs increasing, a large number of Americans have turned to renting. And equity funds that are there to corner the market are cashing in.

For example, New York–based investment firm The Blackstone Group L.P. (NYSE/BX) is buying a staggering $100 million worth of houses each week. With a median existing-home sales price of $178,000, this translates into 561 new homes every seven days. This number could be significantly higher if Blackstone dips its toe into the distressed housing market. The company, which has $205 billion in assets, said it has acquired about 7,000 single-family homes. (Source: “Colony Spends $1.5 Billion on Homes as Next REIT Boom: Mortgages,” Bloomberg, October 26, 2012, last accessed November 27, 2012.

Colony Capital LLC, which has acquired 5,500 homes since April, expects to spend as much as $1.5 billion to purchase up to 20,000 homes by the end of 2013. (Source: “Colony Spends $1.5 Billion on Homes as Next REIT Boom: Mortgages,” Bloomberg, October 26, 2012, last accessed November 27, 2012.)

Waypoint Real Estate Group is an Oakland-based investment firm that’s snapping up foreclosed homes in Atlanta, Phoenix, Chicago, and California. Waypoint currently has about 2,500 rental homes and expects to increase its portfolio to 10,000 units worth about $1.5 billion by the end of 2013. Once Waypoint buys a property, it typically spends $20,000 to $25,000 on renovations.

Scottsdale, Arizona-based The Empire Group owns about 1,000 homes in the Phoenix area and spends close to $7,000 to restore each of the distressed properties it purchases.

What does all of this mean for investors? When there’s a gold rush, buy shovels.

Builders FirstSource, Inc. (NASDAQ/BLDR) manufactures and supplies structural and related building products (lumber, windows, doors, cabinets, hardware, insulation, etc.) for residential construction.

In addition to an online store, Orchard Supply Hardware Stores Corporation (NASDAQ/OSH) operates more than 85 home centers in California, from Los Angeles to Redding in the north. The company offers products in several home improvement categories, including garden and nursery; heating, cooling, insulation, and ventilation; home safety and emergency preparation; plumbing; and renovation and decoration.

By all appearances, existing-home sales in the U.S. are being driven off the books by investment firms. If investors are in the driver’s seat, sales will continue to climb until the price point becomes untenable. If individual homeowners are behind the increase, we might experience a longer, more sustainable rally.

Whether it’s first-time homebuyers or investment firms, as long as existing- and new-home builds continue to increase, home improvement companies could be the biggest winners.

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