U.S. Housing Big Money Update

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In the Front Door and Out the Back

Lately I have been updating the U.S. Recovery which looks like it is quickly turning into an Un-Recovery.

The top of the chart mashup shows the negative correlation building between the benchmark 10 year U.S. Treasury Yield ($TNX) and the iShares ETF (IYR) which tracks the Dow Jones U.S. Real Estate Index.

U.S. Real Estate cash proxy buyers (IYR) are selling into what looks like a top set last week while 10 Year Yields ($TNX) take another step up from the low set back in July 2011.

The lower chart above via ZeroHedge and the Wall Street Journal shows that short term flipping of real estate held for 6 months or less in California is at the highest levels comparable with 2004-05 levels. Get in, get out, don't overstay because there is negative yield if the property is held. 

As I demonstrated in my recent Vancouver Condo Investor Case Study, a buy and hold investor needs a minimum positive cash flow yield in excess of a 10 year bond otherwise what is the reward for taking on the risk? 

In the U.S. markets where flipping is the hot game, net operating income is not a calculus. The institutional money and cash buyers who can cherry pick ahead of the crowd are looking for capital gains not cash flow. Again from Zero Hedge

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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.

"6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies" Dear reader, that is not an undertaking for investment yield, that is a speculation that a capital gain can be made in the short term, and that is the basis behind the so called "Housing Recovery". Get in first, get out first.

One more note should be made and again from ZeroHedge, and the L.A. Times is that the institutional owners of foreclosed properties have held them back from the market keeping the supply low and the retail bidding high.

"...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."