5 Reasons the Housing Market Will Not Crash (Again)
By Andrew Jeffery
NEW YORK ( Minyanville) -- Three years of wrong predictions notwithstanding, perma-bears are emerging from a winter's hibernation with tall tales of another impending collapse in home prices. They could not be more wrong.
For pundits, academics, bloggers and others who get their market "color" from crunching numbers and poring over 50-page-long analyst reports, the situation is dire: Foreclosure machines are whirring again with the big attorney general settlement behind us, employment conditions remain tepid, and getting a mortgage isn't getting any easier.
And while we may be years away from renewed, sustainable appreciations, there is little actual evidence to support the thesis that home prices are about to implode again. All the above statements by the likes of Zero Hedge may be true, but they only tell half the story and amount to a thinly veiled attempt at fear-mongering, whose real time for glory was in 2006, not 2012.
Here are my top five reasons why the housing market will not crash (again):
1. Foreclosure demand far outweighs supply.
The supply numbers aren't pretty. Recent reports show that "shadow inventory," the supply of potential foreclosures in the pipeline at banks like JP Morgan (JPM) , Bank of America (BAC) , Wells Fargo (WFC) and Citigroup(C) , is approaching 10 million homes. And with the settlement between big mortgage servicers and state attorney generals over the robosigning debacle behind us, it is true that lenders are again foreclosing at rapid rate.
But what about demand? Buyers of foreclosed homes are literally lining up at auctions to outbid each other. Talk to anyone who is actually in the business of buying and selling bank-owned properties and they will tell you that, in most markets, demand far outweighs supply. Any property priced even remotely well sells above list with multiple offers. The demand pool is deep, and now there is a new buyer in town with very, very deep pockets: Wall Street.
Earlier this year, the Obama Administration announced a pilot program to try and turn the vast inventory of homes owned into rentals. Big investment houses, including Wall Street titans like Fortress(FIG) , Barclays(BCS) and UBS(UBS) , are launching funds to snatch up big pools of homes to rent and hold. Notably, these firms' longer term outlook and modest cash flow targets enable them to pay 10-15% higher prices than your average house flipper.
These funds are all well capitalized and are being joined by scores of family offices, smaller operators and other investors who, short of any novel investment ideas, are following the "smart money." This deep demand pool is more than sufficient to sop up foreclosure supply for the foreseeable future. Whether this trade will go well, however, is another story for another time. (Spoiler Alert: It won't.)