The Real Force Behind Cheap Housing (XHB, BX)
George Leong: The housing market has clearly reached a bottom and is turning higher. After years of dismal sales, increasing foreclosures and short sales, and declining home prices, there’s strong optimism, which has resulted in sizzling demand for homebuilder stocks.
Yet the recovery in the housing market has been helped in a great part by heavy buying by both retail real estate investors and major institutions. According to the National Association of Realtors, cash buyers and large investors account for about 32% of home purchases across the country. (Source: Timiraos, N., “Investors Pile Into Housing, This Time as Landlords,” Wall Street Journal March 25, 2013.)
Institutional buying in the housing market has been significant. One of the major buyers has been the The Blackstone Group L.P. (NYSE:BX), which has $57.0 billion in real estate holdings and another $11.0 billion available to invest. (Source: The Blackstone Group L.P. web site, last accessed March 26, 2013.) The company started a unit called “Invitation Homes” to acquire distressed single-family homes and eventually lease them.
What is happening is that, with the major contraction in home prices being driven by foreclosures, short sales, and cheap financing rates, we are seeing a heavy flow of investors headed into the housing market, taking advantage of the homeowners who were squeezed out by the subprime credit crisis, losing their homes.
While the overall housing market has strengthened, if not for the inflow of investment money, I wonder if the housing market would have recovered at the same pace.
The housing market, especially in warm climate regions such as Florida and Arizona, has also been triggered by the inflow of foreign capital into the country. For the 12 months ended March 2012, foreign buyers purchased about $82.5 billion in U.S. property (4.8% of total U.S. sales), up from around $66.4 billion for the 12 months ended March 2011. (Source: “2012 Profile of International Home Buying Activity,” National Association of Realtors web site, last accessed March 26, 2013.) The report indicated that the top regions for buyers were Arizona, California, Florida, and Texas, accounting for 51% of sales. The top-five foreign buyers were Canada, China, Mexico, India, and the United Kingdom.
Technical analysis of the stock chart for the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) exchange-traded fund (ETF), which follows the S&P Homebuilders Select Industry Index, shows the upward trend from the October 2011 bottom to the current high. The upward break near the $27.00 level was bullish after breaking out from some topping action, but there appears to be some stalling.
Chart courtesy of www.StockCharts.com
At this juncture, if you hold some of the hot homebuilder stocks, I would be taking some money off the table after the run-up in the housing market stocks.