02 May 2015

Look Out Below!

If there is a rule in modern investments, it is that they will become increasingly complex, and then the small investors get in, the "Smart Money", who created the complexity, and there is a crash, where retail investors lose.

It follows fairly simply from Saroff's Rule.*

Well, it's happening again, less than 7 years after the last crash:
People buying homes to live in – rather than as investments to be rented out – form the bedrock of a healthy housing market. It was once called the American Dream. Then came the bubble, its collapse, and the new boom that is already a bigger bubble than the prior one in many cities. And in some metro areas, investors are now the majority of buyers!

In the first quarter, the proportion of owner-occupant buyers fell to 63.2% of all residential sales, down from 65.8% in the fourth quarter last year, and down from 68.6% a year ago, RealtyTrac reported today. It was the lowest quarterly level in the data series going back to 2011.

Who were the other buyers? Investors. The report defined them as buyers who purchased a property but then had their property tax bill mailed to a different address. And these investors accounted for a record of 36.8% of all home sales.

In some metro areas, investors went hog-wild, elbowing owner-occupants into minority status. Here are the metro areas with a population of at least 500,000 where this miracle of our “healed” housing market has occurred in Q1, the miracle being that investors make up the majority of all homebuyers:


But “institutional investors,” entities that buy 10 or more units a year, accounted for only 3.4% of total sales in Q1, the lowest level in the data series, down from 6.2% in Q1 2014, and from 8.7% during the heyday in Q1 2013. These big investors, including large PE firms that used to buy tens of thousands of units – the “smart money” – have been losing interest for two years. But in the last quarter, they just about pulled up their stakes:

The investors that are now piling into the market like never before are “smaller, mid-tier, and mom-and-pop investors,” explained RealtyTrac VP Daren Blomquist.
And these investors are much more highly leveraged:
Of all investors, 44.7% were all-cash buyers, down from 61% a year ago. Cheap debt is just too tempting. A large variety of easy-money financing options have become available for small investors as “a new crop of nationwide companies has emerged offering financing specifically for investment properties,” Blomquist said. I can attest to that; I get their spam in my inbox.
Look out below.

History may not repeat itself, but there is some seriously heavy duty rhyming going on right now.

I expect another bust sometime in the next 2-3 years.

If some of the banksters were breaking rocks in a Federal Penitentiary, it would not have repeated itself so soon.

It would have taken at least a decade for the finance industry to create a new infrastructure of fraud.

* Saroff's Rule: If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive.


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