The number of Americans renting has grown since the recession hit. The nation has shifted from one where everyone should own to one where many should rent (and rent from a large hedge fund or Wall Street investor). We have become a renter nation. The demand from investors buying through large financial institutions for the purpose of renting out single-family homes has never reached this manic level in history. Even last month, roughly 30 percent of all home purchases continued to go to the investor crowd.    So it should be no surprise that the first-ever bond backed by US home-rental cash flows is now being backed by Wall Street. This is a $500 million deal for Blackstone and is being structured by Deutsche Bank, Credit Suisse and JP Morgan. The deal is listed under “Invitation Homes 2013-SFR1†bringing back the days of the CDOs and complicated derivative structures that imploded on the balance sheets of many banks. These REO-to-rental structures seem good on paper but anyone involved in the rental business knows how fickle these markets can become. Plus, should the economy ease up again what do you think will happen to those rental cash flows? Also, some of these hedge funds have focused all their attention in areas like Nevada and Arizona that fully depend on the housing market going up and up and for these areas, investors have been buying upwards of 50 percent of supply.
The New York Fed issues a quarterly report on credit conditions in the US. The recent report highlights a continuing trend showing young Americans are going deep into debt to pay for their expensive college educations. In fact, student debt is now the largest non-mortgage related debt in the country. This problem reflects a big issue for young potential home buyers. It also helps to explain why the homeownership rate for young households continues to fall and why many young adults are living at home. Many are coming out of college with student debt levels of $50,000 or even $100,000 and job opportunities are not justifying the costs for many graduates. Yet given our lack of good pay blue collar work, going this road is perceived as viable given that non-college educated Americans have very limited opportunities. Given the recent rise in home prices and lack of wage growth especially for the young, it is likely that the homeownership rate will continue to fall for this group. In places like California many parents are finding it necessary to gift or provide down payment assistance for their children to buy even a starter home. This assistance isn’t a few thousand dollars but tens of thousands or even hundreds of thousands of dollars. The young are being priced out of buying a home.
The Fed is the housing market. That sentence is often thrown around but there is little hyperbole here. Since September of 2012, the Fed has essentially purchased all mortgage backed securities (MBS) issued. This is a massive deal for the biggest household debt market on the planet. The Fed started QE1 memorably on December of 2008 and this phase ended in March of 2010. QE2 started in November of 2010 and ended in June 2011. QE3 started in September and 2012 and has been dubbed “QE infinity†since the Fed is now essentially purchasing all MBS issuances with no stop date planned. The perception is that the Fed can fully control interest rates and to a certain degree this is true (or was true). But why did rates rise more than 100 basis points this year at the apex of Fed MBS buying? First, QE has been going on for nearly five years now. The “market†is fully manipulated. Looking back at the last half decade of data, we find that current Fed policy has been a boon for investors and has priced out many American households.
The housing market is definitely softening. Sales are slowing down, price reductions are increasing, and affordability has decreased dramatically because of spiking interest rates. The problem with relying with artificial stimulus is that the market becomes conditioned to easy money. A recent survey found that only 1 out of 3 Californians had the means to purchase a home, down from 49 percent one year ago. The big change has come from spiking prices, weak wage growth, and of course a 100 basis point increase in interest rates. So it should come as no surprise that inventory is up and more sellers are facing the need to reduce prices. This QE experiment has ‘worked’ but now bigger action is needed to keep the gig going. The Fed owns the mortgage market but with a job report that appears to be solid on the surface, the Fed is now having more pressure to taper. Of course looking at the evidence there will be no taper but perception is the name of the game. One thing is certain and that is, it looks like a tipping point is here.
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