New US home sales hit two-year high
Source: Financial Times
New home sales in the US rose in May to a two-year high, offering the latest sign of momentum in the recovery of the housing market even as other parts of the country’s economy are slowing down.
Sales of new single-family homes rose 7.6 per cent to a seasonally adjusted 369,000-unit annual rate last month, the highest since April 2010, according to Department of Commerce statistics. Analysts had expected a figure of 350,000 for May.
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Some Thoughts On Investing In The "Bottom" In Housing
Investor buying has helped put a floor under the housing market. The rental housing market is currently robust, but that is dependent on a highly artificial economy supported by unprecedented government stimulus and transfers.
In my previous entry on housing's presumptive "bottom," ( The Housing Recovery: Based on What? June 20, 2012), I showed that the conventional foundations of the housing market were impaired: demand was weakened by demographics and declining income/employment, and supply was still well above the organic growth of new household formation.
The housing "Bulls" who think the millions of young people living in basements can afford to buy a house despite having high student debt, little job security and declining incomes are either delusional or they are studiously ignoring the causal relation between buying a house and qualifying for a conventional mortgage, i.e. the financial factors of current debt loads, income, the need for a down payment, etc.
The majority of wage earners have seen real incomes decline and most households have high debt levels.
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Not buying a house is a choice for a relatively few who qualify but who choose to rent. The vast majority of people who do qualify to own a home by conventional standards already own a home (65% of all households). Those who don't own generally do not qualify due to insufficient income, heavy debt loads, poor credit, etc.
There are two significant pools of buyers, however, who have become very active in the U.S. and Canadian real estate markets: domestic and overseas investors. Their buying has soaked up quite a bit of inventory--up to 40% of all home purchases in some areas have been all cash, a transaction that typifies investor buying rather than young people moving out of basements.
Each pool of investors is motivated by different forces. Domestically, the Federal Reserve's ZIRP (zero-interest rate policy) has turned cash into trash, and investors desperate for a return above 2% without the risks of the stock market casino have flooded into the rental housing market.
In California, roughly 30% of all house purchases have been for cash (investors). Some may be planning to improve and then "flip" the house as the market improves (the housing bubble redux strategy), while others are assembling a portfolio of rental properties.
I recently came across a local real estate listing in a desirable Bay Area (Northern California) location (near a University of California campus) for a multi-unit rental building: $4.9 million for 40 units, with a net of all expenses of $150,000 (not counting depreciation or tax benefits). That's a 3% return on a cash purchase, but the real yield is much higher if the buy is made with a 35% cash down payment and 65% mortgage. Regardless of the financing, the yield instantly doubles with depreciation and basic tax benefits, and could even be higher in some circumstances.
The higher yield and relatively low risk of owning rentals in a high-demand area make real estate more attractive than other investments such as 10-year bonds or dividends. As a bonus, if housing does recover, there is the potential for a capital gain.
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