As Interest Rates Rise, Gentrification Intensifies, and Investors See Green

Jacob Harper  |

The home buying market is undergoing an interesting transition as it continues its long recovery from the collapse of 2009. This summer has seen the most prolonged signs of recovery since the bust happened. Interestingly, it’s not always single families buying the homes. As property values rise and gentrification sweep the country, more and more investors are getting into buying not just single homes, but entire blocks.

The Collapse

Most people know the origin story of the collapse. Millions of people entered into mortgages they couldn’t afford, teased in by adjustable-rate mortgages. Millions lost these houses as they went into foreclosure. Entire streets went vacant, as banks took back control of the houses buyers could no longer afford.

Many times, the banks, rather than sit on houses and play landlord, would try to sell out the houses to buyers at cut rates. As homebuyers are often leery of being the first kid on the vacant block, it sometimes took time to redevelop a neighborhood, and banks would grow impatient, and cut prices again. A home-buyer credit designed to spur growth briefly perked up sales in the immediate aftermath, but after that expired in 2010, existing home sales once again fell.   

The Turnaround

But for the first time since the crash, things aren’t just looking good, they’re looking spectacular. On Aug. 21 the National Association of Realtors released their reports on existing home sales for the month, and the rise of 6.5 percent crushed analyst expectations, capping off an impressive three month run of sales.  According to NAR spokesman Walter Molony, “We haven’t had 5 million (existing home sales) or greater since the second quarter of 2007.” Which, incidentally, was the last quarter before the crash began.

Interestingly, this jump in sales has taken place while mortgage interest rates continue to rise. In July the average on a 30-year-note rose to 4.37, a full point over what they were in May, and higher than they’ve been in two years. The median price of homes as well rose 14 percent from the previous year, to $213,500.   

This has contributed to REITs preciptous decline. The popular American Capital Agency Group ($AGNC) is down 19.17 percent on the year, and ARMOUR Residential REIT (ARR) is down an astounding 34.13 YTD. But while REITs still lag, there's no question: on the surface, the housing market appears to be recovering.

The Long Game

So home sales are increasing while interest rates are rising and homes are getting more expensive. If this trend seems counterintuitive, it helps to consider that it isn’t always single families buying the new homes. But rather, investors looking to flip.

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Numbers from Goldman Sachs support the assumption that the majority of new home buyers aren’t people looking to move in, but investors looking to cash out. Goldman says a cash transactions (or money down) now account for a whopping 57 percent of all home transactions, up from around 20 percent prior to the crash in 2007.  

This strongly implies that home sales are going to investors, foreign buyers, or wealthy homeowners. In any case, it makes it look like investors are buying houses that nobody is yet living in, which would be worrying indeed. And eerily reminiscent of the trend in China of “invest and they will come” that has seen the proliferation of massive, beautiful, yet empty housing tracts across the country.

But unlike normal “flippers,” some investors are taking an interesting approach: they’re investing not just in single homes, or even a row, but entire neighborhoods.

Gentrification, Inc.

As the Wall Street Journal pointed out, one of the hottest real estate markets in the country, the Bay Area, has seen a massive uptick in investment firms buying up those vacated blocks. But rather than just invest in solitary homes, these real estate investment groups are often engaging in full-on neighborhood restoration.

In Oakland, projects like fixing streets, mending sidewalks, redoing landscapes – all usually the job of the city – are being undertaken by groups that see potential in large scale neighborhood beautification, and an assumed concomitant rise in property values.

The mass purchases and beautification efforts are happening in predominantly urban, lower class neighborhoods that investors hope to use to attract more affluent buyers, the classic recipe for gentrification.

The problem is, if everyone’s investing and no one’s moving in, all the investment in the world won’t matter, because the market, and possibly the entire “recovery,” will have been entirely invented.

Is Another Crash Approaching?

There are, however, other explanations for the cash-buying trend that isn’t just investors. As the economic recovery continues, people’s entire conception of how they should be living has changed.

That is, sometimes homes are being sold without mortgages because buyers simply don’t want the hassle of a mortgage. Since the crash, people have become more wary of taking on debt, and might be more amenable to living more modestly. This trend, especially concerning Boomers who have equity to cash out and spend, has been expected for some time, and may be finally panning out. If this is true, it would seem to support the opinion that, on a whole, the housing recovery is real, and investors are right to try to capitalize.

Whether the over 200 percent increase in cash-only sales is the result of empty nesters moving down, risk-averse middle class urbanites, or investment groups looking to gentrify at a rapid rate remains to be seen. All that’s for certain is analysts will be watching closely

Barclays economist Michael Gapen said as much in a note following the NAR’s report: ``The recovery in housing will prove resilient to any broader slowing in the economy and the recent rise in mortgage interest rates to date, but we will be watching for any signs of weakness or fragility as a result of the significant rise in real interest rates.''

(image courtesy of Flickr)

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