Photo: Courtesy of Realtor.com
Long time real estate pros in Southern California are seeing a phenomenon they have never seen before. The 1 per cent is buying up all the low end SoCal real estate! This was reported by the LA Times.Meantime, Tom Lee was on Bloomberg on 5/21/2012 pumping the housing market. Like a good soldier of the 1 per cent, JP Morgan’s Lee was saying that real estate will help kindle a boom in manufacturing in the United States. But if you keep in mind that many of the investors pumping the low end of the real estate market are in fact private equity funds, the investors not in the 1 per cent should beware.
What could happen is that the 1 per cent will squeeze everyone else out of the market, and undercut rental prices. While this is temporarily good for renters, cornering the market by the big boys will not help renters in the long run. Remember, this money could be hot money as well, coming from all over the world to give a boost to real estate that may not last.
We know that the investment funds were talking about getting into these markets, but now they are in the markets and we have locals making us painfully aware of that fact. From the same LA Times article, Mia Melle, a rental management pro, says that many of her clients are now private equity funds.
I found this sort of thing happening in Nevada, a shortage of housing on the low end. It was primarily because of the laws implemented to slow down the foreclosure process. But the speed at which the low end RE was gobbled up was astounding, going from almost 20,000 units down to 1,600 units available in just a short time.
The question must be asked if this investment fund buying is going on in Las Vegas as well. The Reno Gazette Journal estimates that 25 per cent of real estate purchases have been made by hedge funds. This enormous percentage can manipulate the housing market until it doesn’t. And that percentage is even higher in places that saw the real estate crash, such as in Las Vegas and Reno.While not advertised, I am convinced that the private equity folks are moving into Nevada with both barrels blazing.
We have seen this crazy behaviour in farmland, which often crashes after being pushed up. We could expect the same with residential real estate. A questions is whether the hedge funds will be stuck after the next bubble or if they will try to sell high to the renters with easy terms. I tend to think selling high to the renters will be the way they deal with serious rises in house prices going forward.
There is only one way that these behaviours by the uber rich will be slowed, and that is by multigenerational housing arrangements. Without a serious effort to push easy money on main street, even a slight rise in housing costs could cause more multigenerational living to be the choice of many.
That is what Tom Lee seems to ignore as he says there are 15 million more adults in the US now than in 2007. He is assuming there is demand on the part of those folks, or is fooling others into thinking that those folks will all seek single family housing. That is a frequent investment banking ploy. Jim Cramer did not foresee the housing bubble precisely because he relied on strong single family formation leading up to the housing meltdown.
But the middle investor could be a sitting duck if the 1 per cent has its way and if the family formation does not pan out. The middle income investor should be careful trying to compete with the 1 per cent in the rental business because that will surely be a losing game. With the advent of the Obama program to dump even more housing in block sales, this investment by the 1 per cent surely will ruin real estate for many.