Hot air rises, and so are housing prices. It appears that Bernanke’s efforts to fund the housing market are beginning to gain some traction. An army of “ex-Wall Street executives” has had more than two years now to re-trench themselves, and move in, to essentially take over the foreclosure and investment property market in the US.
The Fed is providing 45 billion dollars per month in “hot air” liquidity for the housing market. Billions of these dollars are being loaned out to newly formed capital / investment entities whose goal is to buy up as many foreclosures as possible, along with any other desirable properties that may be available.
A number of industry professionals are telling me that prices are beginning to rise significantly and the inventory of available foreclosures is dwindling. This is creating a demand for housing that is resulting in a tighter supply and driving selling prices upward like a balloon. But when the hot air runs out, the balloon falls back to the ground.
These buyers are not end users. A housing market driven by investment activity could prove to be much more volatile than a housing market driven by more traditional owner occupant activity.
Some of these businesses, formed as “early” as 2011, have already gone from start-up investing operations to publicly held companies. There is no mistaking what is happening here. Wall Street sees an unprecedented opportunity to profit from the housing market once again.
The Fed wants to keep interest rates low and “create jobs” by liquefying the housing market just as they did in the early 2000?s. The banks hope that all of this activity will result in improved balance sheets via profitable loans and improving housing prices. And those who made money during the housing boom see another opportunity to profit from the housing bust and the resulting foreclosures.
Indeed one of the interesting aspects of real estate is it’s ability to generate cash flows in a variety of ways. Shelter is a high demand item, desired by virtually everyone in the world. It’s high dollar value, perhaps $9 TRILLION at this point, makes the US housing market one of the wealthiest sectors on earth, even after the housing bust.
Stock market savvy investment companies are using “Bernanke Bucks” to buy tens of thousands of foreclosures which they plan to rent or sell, while turning this cash flow into a profit bonanza via a stock IPO. There are a handful of these companies which are already public or nearly public, making much more off of the stock sale than they would as ordinary real estate investors.
Could this be the beginning of a new investment bubble? I think the answer is “yes”. Fundamentally we are talking about the power of none other than the Federal Reserve, the Wall Street banks, and investment companies created by guys with Wall Street connections. They have the ability to monetize the cash flows into the stock market. This promises to be the biggest real estate investment innovation since derivatives were invented.
This is the same methodology that gave us the original housing bubble. Wall Street has learned a lot about manipulating the housing market. And with the development of stock market oriented real estate investment companies, they are developing the ability to “manufacture” a housing recovery.
I expect you’ll hear lots of news in 2013 about how the housing market is improving, and prices are rising. As long as the Fed remains willing to keep the bucks flowing, we’re going to see more and more foreclosed properties flowing to large scale investing operations. This is a fundamental transformation in the housing market that is unprecedented.
It’s going to take a few more years for this entire scenario to unfold, but at some point, it’s safe to say that prices and ownership costs may reach unsupportable levels once again, leading to another bust. Only time will tell how big this bubble will become and how much hot air will be necessary to inflate it.