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Rising Home Prices And Falling Unemployment: Don't Trust the Numbers

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Reduced real estate price (Photo credit: futureatlas.com)

The nation’s unemployment rate fell this morning to 7.6%. That’s good news…right?

Home prices are rising smartly around the country. That’s good news…right?

Wrong…on both counts.

Unemployment is only lower because there are fewer workers in the labor force.

Single-family home prices are only higher because institutional investors are buying up distressed properties, one at a time and in bulk, as fast as their flash cash can fly.

The falling unemployment rate is easy to see through. With only 88,000 jobs added in March, where estimates called for 200,000 new jobs, the ranks of the unemployed only decreased because the number of people in the total labor force decreased.

Workers are still here, only they’ve given up looking for work and because they aren’t considered unemployed if they aren’t looking for work, the rate goes down. America’s labor participation rate is now 63.3%. That’s the lowest it’s been since 1979. Unemployment isn’t shrinking. The number of people looking for work who haven’t been able to find jobs for months and years and have just given up isn't shrinking, it's growing.

 What’s not as easy to see through as bogus unemployment numbers, but equally dangerous, is what’s really driving higher home prices around the country.

 If you think rapidly rising home prices is a good trend, you might want to think again.

Homes, not one here and one there, but homes in bulk, are a tradeable asset class. Though considerably shy of the of 20 plus trillion dollar market for credit default swaps (derivatives also capable of mass destruction), pools of single-family homes wrapped in mortgage-backed securities blankets dwarf all other tradeable instruments.

Now, or I should say, again, just when you thought it was safe to bottom-fish in the distressed single-family housing market, maybe for a home for you and your family, along comes the Wall Street gang, again.

Institutional buyers are beating owner-occupied traditional home buyers to the market. With gigantic hoards of cash at their disposal they are buying distressed properties, mostly those in foreclosure or through lender facilitated short sales, one at a time and in bulk where they can.

Publicly traded alternative investment and capital management firm (formerly a private equity shop) Blackstone Group (BX) has been leading the charge. Blackstone has already spent more than $3.5 billion to amass a portfolio of more than 16,000 single-family homes.

Stephen Schwarzman, Chairman, CEO and Co-Founder of Blackstone recently said the firm was spending about $100 million a week buying homes.

Silver Bay Realty Trust Corp (SBY) is a newly spun-off  real estate investment trust, shed from its REIT parent Two Harbors Investment Corp. (TWO), that owns 3400 homes and is adding to its inventory of purchased-to-rent properties.

Private capital has also been flooding into the market. Well-heeled funds are being backed by the likes of Colony Capital, GI Partners and several huge hedge funds.

Estimates of investor inventories of purchased homes ranges from 50,000 to several hundred thousand properties.

The game is bottom-fishing for deals, fixing up the properties and renting them.

Massive institutional interest has helped firm up prices, but may also be dangerously pushing some markets too high too fast.

Prices have increased for 12 straight months in 47 out of 50 states. According to CoreLogic data provider, U.S. home prices jumped in February by the largest amount in 7 years. The biggest jumps last year were in Nevada, where prices rose 19.3%; in Arizona, where prices rose 18.6%; and in California which saw a 15.3% pop in prices.

So, what’s the problem?

On the surface, like falling headline unemployment figures, rising home prices look good. But, a closer look will surely give average Americans heart palpitations.

Institutional investors are crowding out traditional owner-occupied buyers and forcing them to pay up more for homes than they would be paying if the fast cash wasn’t everywhere. If that trend continues, and it will because like any market that can be theoretically cornered (not nationally necessarily, but conceivably “locally”), the first-in money will try and create a floor and push prices higher to sell out as high as possible.

There’s going to come a time when mortgage lenders are going to look at the rapid appreciation that’s happening and ask themselves what will be left for traditional buyers getting in with a mortgage after the ride nears another potential peaking point?

On the other side, the institutional cash being put to work isn’t going to be left out there. Bulk buyers will securitize the cash flow from rentals, with the rental homes as collateral, and do what traders do…create liquidity for themselves where there currently isn’t any.

Haven’t we been here before?

The last time this game was played, home-buyers were counted on as having “skin in the game,” and were supposed to stick out their losses. That didn’t happen. Are we supposed to now believe that renters will be better cash flow facilitators?

I’m not saying this is going to be déjà vu all over again, but it’s certainly worth watching.

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