The real estate industry could be building another house of cards.
Unlike the fragile structure that caused the housing industry collapse a few years ago — sparked by the well-documented problem of unqualified buyers — this one comes courtesy of very big investment firms buying houses by the thousands.
And this bulk buying by investment firms — generally accustomed to purchasing companies for billions rather than foreclosed single family homes for dimes on the dollar — is causing a rise in real estate prices that might not be all it seems.
Let me give you some numbers.
Last year 4,666,000 existing homes were bought in the US. That number was 6.4 percent higher than the 4,260,000 homes that sold in 2011.
You’ll need some more figures to put things into perspective. In 2007 — before the collapse — the housing industry had a banner year when 5.03 million existing homes were sold in the US.
That number dropped all the way to 4.11 million in 2008 before rebounding to 4.34 million in 2009. Then sales settled back to 4.19 million in 2010. The industry has been in an up-and-down, nothing-special kind of trend.
So it is good news that sales are back to 4.666 million a year. And it’s comforting to those who already own a house (and disquieting to those who don’t) to know that prices in January were up 8.1 percent from a year earlier, according to the S&P/Case-Shiller index of prices in 20 major metropolitan areas.
But here’s what you also need to know.
A very well-financed company called Blackstone Group purchased 21,000 of those 4.666 million homes sold in 2012. And another rich investment firm named Colony Capital bought 8,000.
There’s no way of knowing how many other American and foreign investment groups scooped up houses by the neighborhoodful. But it’s safe to assume that these two weren’t the only ones, and they might not have even been the biggest purchasers.
There could be hundreds or even thousands of such big-time buyers.
Even investor Warren Buffett said at one point that he’d like to bulk-buy houses, although he thought that it wasn’t practical to do so.
So, yes, there may be a housing industry recovery in the sense that more homes are being purchased. But this doesn’t qualify as an upturn in the traditional sense, meaning: This improvement hasn’t come about because a lot more American families are feeling good about the economy and their job prospects.
Instead, the upturn is more macro-economic in nature. Blackstone, Colony and others think some of their assets can be productively used to pick bargains in the depressed real estate market. These big investment companies like the current low interest rates and real-estate prices.
But they, like art dealers and gold bugs, may simply be lured to tangible assets. If the health of any of the world’s currencies is suspect, then real estate makes a good safe haven.
Will Blackstone and Colony and the others hold their newly purchased homes for many years? Probably not.
In fact, Blackstone tells me that it envisions renting these homes for two- or three-year periods. What happens after the first round of tenants moves out is anyone’s guess.
And these big investors aren’t buying homes randomly. Blackstone, for instance, is concentrating on only a dozen metropolitan areas, including Phoenix, Tampa, Atlanta and Chicago.
The rise in the price of real estate should also be causing concerns about inflation, because a home is the biggest, most illiquid purchase most families will ever make. But Washington takes care of that via the way it calculates home costs in the consumer price index.
Instead of calculating the actual price increase of homes in the CPI, the Bureau of Labor Statistics questions people on what it would cost them to rent their own houses.
It’s quite arbitrary. But if homeowners indicate they think the cost of renting their own home has increased, it will make the CPI go up. If they claim the price of renting their own home hasn’t changed, it helps keep the CPI subdued and the inflation-watching Fed happy.
This odd way of calculating home prices helps to keep inflation in check when real estate prices rise.
Is that a legitimate way to measure inflation? The Ph.D. economists at the Fed would say it is. But a family that’s looking to buy a house and finds itself having to bid against deep-pocketed Blackstone for the property might disagree.
We all want the economy, including the real estate industry, to do better. But isn’t it time we stopped deceiving ourselves?
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