Who Will Buy the Homes to Support The Housing Recovery?

Who is Buying Homes?

With investors leaving the housing market, which group will be able to buy houses to sustain rising home prices.

Real Estate News

Bloomberg recently reported that Blackstone has cut its home buying binge* by 70% as home prices and mortgage rates have surged. The article also noted that American Homes 4 Rent, Colony Financial Inc. and American Residential Properties Inc. have also slowed their house acquisitions significantly. These companies will need to focus on improving the vacancy rates on the tens of thousands of homes that they bought and securitizing their rental income streams.

We have noted often that the housing recovery of the past 12-24 months has been in price only and has been driven mainly by low inventory, artificially low interest rates and demand from institutional investors who have constituted around 40 percent of the home purchases during that time period. Home sales to first time home buyers as a percentage of homes sold and the number of new homes built are at or near all time lows. The home ownership rate has fallen during the housing ‘recovery’ to an 18 year low.

With investors exiting the housing market and focusing now on trying to rent out the inventory they have purchased, who will buy the homes to keep the housing (price) recovery going? Home sales have been low throughout the housing ‘recovery’. Now there is evidence that the tepid pace of home sales is slowing further as mortgage applications, home sales and new construction starts are declining. Existing home sales are at a 19 month low.

Who Will Buy the Homes to Keep the Housing (Price) Recovery Going?

Millennials & First Time Home Buyers?

Millennials, as we have pointed out since the beginning of Smaulgld.com, are in no position to buy homes because of their high unemployment/underemployment rates and crushing student loan debt. Household formation among millennials is low and prevailing economic circumstances are shutting them out of the housing market. For many millennials, staying at home may reflect a cultural and generational shift. Higher mortgage interest rates and higher home prices will put homeownership further out of reach.

Baby Boomers?

Aging baby boomers are not looking to buy new and larger higher priced homes. Many boomers will be selling their homes and searching for smaller accommodations. They may move in with relatives or move to retirement homes but most won’t be buying new and larger homes.

Move up Buyers?

For the up to 40% of home owners with mortgages underwater, moving out and moving up is not a possibility. For those homeowners not underwater, stagnant wages or spells of unemployment, financing their children’s education or servicing their student loan debts will sap the financial resources required to purchase move up houses.


Foreigners have made up significant portions of the higher end home sales in upscale markets like San Francisco and New York and a decent amount of the lower end sales in Florida. Foreigners however, constituted only 6.3% of all home purchases in the United States in 2013. I addition fifty-eight percent of foreign home purchases were concentrated in four states- California, Texas, Florida and home purchases by foreigners in the United States is declining.

As investors and foreigners leave the housing market there will be even fewer buyers capable of buying at the current higher “recovery” housing prices and the housing inventory shortage will become a glut unless prices come down.

Recovery, Recovery, Recovery, Recovery

The delusion of a housing recovery still exits, with some predicting 2014 to be the strongest year for housing since the bust in the mid 2000’s.

Even though the numbers don’t support an economic or housing recovery, housing pundits and real estate industry participants insist that things are looking up.

From NPR:

“And right now, each month Americans get more jobs, the economy’s getting better, so we very well may start to see more homes getting bought.”

From CNBC:

“As the housing market moves slowly into recovery, more and more Americans are gaining confidence and hoping to jump into home ownership.”

The Problem Isn’t Low Inventory, It’s Low Demand

The lack of a stronger housing recovery can’t be blamed on low inventory. It’s low demand that is holding back more home sales and more new home building. Housing demand at current prices, coupled with investors leaving the housing market, is going to drop further. Housing demand needs to be defined not by hope but by potential home buyers’ ability and desire to buy homes. Clearly, the ability is lacking.

Higher prices will add more inventory to the housing market this spring, but the addition of that inventory will have the effect of lowering prices if there is not a large enough group of capable and qualified buyers.

If low inventory was really the issue with the housing market, new home builders would be dramatically increasing construction. They are not, as new home permits and new home starts are down for the past three months as are mortgage applications. Home builders have gauged demand and have adjusted their construction schedules downward.

A recent survey by Zillow showed that over four million renters wanted to buy homes. Of course want and ability are two different things so that survey can be tossed aside with a grain of salt into the wishful thinking pile.

Who Will Buy the U.S. Treasuries When the Fed Stops Buying Them?

With the Federal Reserve seemingly intent on winding down its quantitative easing program that involves buying between 70-90% of newly issued U.S. Treasury bonds (T-Bonds) and a good portion of the exisiting mortgage backed securities(MBS’s) in order to keep interest rates low, who will buy them when the Fed exists the market? Without the Fed buying up tens of billions of dollars worth of T-Bonds and MBS’s a month, interest rates will rise, putting downward pressure on home sales and home prices.

As house sales slow, its only a matter of time until house prices drop and the housing “recovery” will be over. Unless a stock market crash ends it first.

*Blackstone bought 88% of their houses in Arizona, California and Florida.

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Further Reading:

The Housing Recovery and the Law of Small Numbers

Why the Housing Recovery is a Farce Illustrated by Two Charts

The False Housing Recovery of 2013 and How it Unravelled

The Recovery Has Reversed – Welcome to the Revocery

Millennials, Not Part of the Club Yet

Student Loans and Unemployment are Holding the Housing Market Back

Waiting for Household Formation

Straining to Regain Real Estate’s Promised Land

The Coming Supply/Demand Real Estate Inventory Reversal

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