Many signs indicate that the housing industry has entered a recovery phase, inspiring new confidence among both lenders and home owners and rejuvenating the US economy as a whole.
However, rising home prices may threaten this nascent recovery according to a recent article from NBC News. Home prices have been steadily increasing for several months, primarily due to investors. Large hedge funds in particular have been buying up undervalued properties in distressed markets as quickly as possible, taking full advantage of their financial might to do so. The properties thus acquired generally become rentals, offering an attractive return of 8 to 12 cents on the dollar.
Investment Properties Are the Driving Force
Rental properties have been the chief force behind the recent growth of the housing market, with construction of multifamily units up 10 percent for the month of October, and over 63 percent higher than the previous year.Single-family starts, by contrast, rose only 35 percent over the past 12 months. The rapid growth of rentals is being driven by a high demand for housing and a relatively small inventory of available properties, particularly in larger markets like California.
The trouble comes when rising housing prices cut into the profit margin expected by investors in rentals. This is further compounded by the uneven nature of the real estate recovery. Some regions of the country are experiencing growth at near-unprecedented levels, while others are still struggling along in the red. Bidding wars have begun between hedge fund speculators in “hot” real estate markets, further inflating home prices.
More Costs = More Problems
Rising costs raise additional problems in the mortgage sector. Investors tend to be cash buyers, taking advantage of their financial depth to avoid financing. The mortgage market is still struggling against restrictive conditions, and many potential homeowners suffer from faulty credit, the inability to put together a down payment, or a lack of consumer confidence in a shaky market. Driven by investor speculation and other market factors, housing costs may be growing faster than the average income, further alienating potential buyers and pushing them back into the rental market.
Prices may rise so quickly in some areas as to frighten off both investors and private home buyers. Were this to occur it could increase the unevenness of the current round of real estate growth, leading to retraction in some areas and threatening nationwide recovery.