Even if we set aside broad, macro concerns, there are still some reasons to be cautious about the housing recovery.
Housing demand in 2012 has been mostly from institutional investors who have seized the opportunity to buy distressed homes at deep discounts and convert them into rentals. While plenty of money is still sitting on the sidelines,that money can disappear if investors determine that the opportunity is no longer attractive.
Hedge Fund Och Ziff Capital (OZM) recently pulled out of the REO(bank-owned foreclosed homes) to rental business .
Institutional investors "may help drive home price appreciation in the short run, but are not likely to do so in the long run," Quinn Eddins, head of research at Radar Logic, a real estate analytics firm, wrote in a recent note."As prices for REO increase, the expected future appreciation must also increase in order for investors to achieve the same return on investment. If prices rise to a point where investors' expectations of future home price appreciation do not support their desired returns, then demand for REO will decline and prices could fall again."Perhaps the rise in prices we are seeing now will lure enough traditional home buyers into the market to offset the decline in institutional interest. But in an interview with TheStreet, Eddins said he believes that scenario is unlikely. First-time buyers still have difficulty getting credit. Even those with excellent credit scores might not be able to save enough for a downpayment amid an uncertain unemployment outlook. Banks may be encouraged to loosen their credit standards amid rising prices, but that too remains uncertain without clarity on new mortgage rules. The Consumer Financial Protection Bureau is expected to release its rules on what constitutes a "qualified mortgage" in early 2013. The rules will define what counts as a safe mortgage, one that a borrower has the ability to repay. Banks will have greater legal protection if they make qualified mortgages. While clarity on the rules will help unlock some constrained lending, the agency needs to ensure that borrowers are protected but at the same time not define a safe mortgage so narrowly that it limits lending.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV