CLICK TO ENLARGE CHART

According to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree) and BTFHousingD. "We just don’t see the returns there that are adequate to incentivize us to continue to invest" Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible." 

Carrington, which started in 2003 as a mortgage investment fund and has managed almost 25,000 rental homes for itself and others, has been joined by hundreds of institutional and international investors buying single-family homes after prices plunged following the housing crash. The firms are building a new institutional real estate asset class from the 14 million leased single-family residences that are worth an estimated $2.8 trillion, according to Goldman Sachs Group Inc. Even as demand for rentals rises amid a falling home ownership rate, yields are declining and companies formed to buy the homes that have gone public haven’t yet been profitable.
 
Funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Rose. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.

"...and guess what states the greatest number of 'halts' are in from these banks - California, Nevada, Arizona - exactly where the surges in price have occurred."

"Sales of homes in foreclosure by Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. ground nearly to a halt after regulators revised their orders on treatment of troubled borrowers during the 60 days before they lose their homes."
 
"The banks said they paused the sales on May 6 to make sure that their late-stage foreclosure procedures were in accordance with the guidelines. The banks wouldn't say exactly which issues had been under scrutiny."

CLICK CHART TO ENLARGE

We (Pacifica Partners Inc.) remain bearish on the Canadian real estate market with real estate appearing overvalued by approximately 30% in most major markets.  Canadian economic weakness, the expected contraction of outstanding consumer credit, and already heightened real estate prices serve as the basis for our bearish stance.

CLICK TO ENLARGE CHART

Says Rosenberg: "There has been a secular decline in Potential GDP (U.S.) growth. Here is a question for you. How does 1.8% GDP growth rate over the last year drop the unemployment rate by 60 basis points from 8.1 to 7.5%? That math simply doesn't work."

"The growth rate of GDP has fallen significantly and this should not be ignored. Historically, the economy could grow at 4% without creating inflation. With the current makeup of the economy today that is no longer possible. This is why we are likely witnessing the early stages of the transition from deflation to inflation and the end of my “love affair” with bonds."

"One of the factors that will be supportive of an economic push will be the end of the (U.S.) household deleveraging cycle. I think that the end of the deleveraging cycle is about 2 years away. As you can see in the next slide borrowing has started to rise once again and will be a tailwind for the economy. This has been the primary goal of the Fed’s QE programs - boost asset prices to stimulate consumer confidence and borrowing."

"There is a problem though. Productivity growth is heading lower because of lack of capital formation. However, unit labor costs are rising which, as I said, has a high correlation to inflation.  The bad news is that rising wage costs negatively impact profit margins." AND "Here is the problem currently. The real fed funds rate is very negative. The last time this occurred was when Author Burns was Fed chairman (1970's, prior to the Volcker 1980's era of mega interest rate increases to kill inflation)." 

"The following two decades were not kind."

Rosenberg goes on to suggest: "These are the areas that should perform the best should this longer term view of the world begin to develop":

Real Estate
TIPS
Art/Collectibles
Gold/Silver
Banks
Staples
Energy
Metals
Agriculture
Credit Arbitrage
Long-Short Strategies
Volatility
Loonie/Aussie/Kiwi