Is private equity starting to head to the exits?

It is no longer a secret that much of the recent run up in housing prices is the result of institutional investors and private equity buying houses on a bulk basis.  This has made it very difficult for traditional buyers to compete in the current market as the investors are buying with all cash forcing traditional buyers to scramble to compete when they are dependent on obtaining financing in a more conservative lending environment.  In some cases this has led traditional buyers to feel so desperate at the prospect of being frozen out of the market that they offer significantly over list price just to win a bidding war.

It is important to remember that it was just this fear of being left behind that led to much of the irrational exuberance near the height of the last bubble.  It is also worth remembering that investors want to foster this perception in the market because buyer sentiment is critical to home price appreciation, which is key to their investment strategy.  As this recent New York Times article points out, while investor capital continues to say that it is in housing for the long-term, investors’ actions are showing the first signs of heading to the exits as they scale back their acquisitions and take money off the table in the form of IPO’s.  It is worth remembering, a smart investor is not likely to tell you what they are doing until they have locked in their position so they can profit off your response.

Can young buyers pick up the slack when investors pull back from the market?

In US News & World Report, Robert Dietz, an economist with the National Association of Homebuilders, asks the question, “What Happens to the Housing Market When the Investors Leave?”  Mr. Dietz points to the fact that the Great Recession forced many younger individuals to delay the formation of new households by moving back in with their parents and/or delaying marriage.  Implicit in his opinion piece is the assumption that there is pent-up demand for new housing once these individuals return to forming new households.

This is not an unreasonable assumption.  However, it may be based more on wishful thinking than actual data.  Recent college grads should hold the best prospects for forming new households and re-entering the housing market.  Unfortunately, Mr. Dietz does not take into account that the tepid pace at which jobs are being created has left a significant portion of this demographic either unemployed or underemployed.  Combine that with the fact that this same group has over $1 trillion in outstanding college debt to be repaid, more of which is going into default every day, and it begs the question, even if they want to form new households or buy a new home, do they have the means to do so?

If economic and job growth does not materially improve, it is hard to see where the resources will come from for them to do so.