Fannie Mae warns of fall in US house prices
01-15-2014
By Tracy Alloway and Anjli Raval in New York
Homes for sale
Weakening demand by financial companies that have been snapping up thousands of US homes on the cheap could fuel a future fall in house prices, the chief economist of Fannie Mae has warned.
The warning is one of the first instances of a US government agency voicing concern about the increased involvement of institutional buyers – including some from the “shadow banking” sector – in the country’s property market.
Private equity firms and specialised investors have spent the years since the financial crisis buying distressed real estate, often with the intention of converting them into more lucrative rental properties.
While interest from institutional buyers has helped US house prices recover in recent years, it has also led to concerns about the financial companies’ ability to act as effective landlords for thousands of properties scattered around the country.
“We had this vision in our head of a 30-year-old junior banker, driving a Range Rover from house to house, trying to collect rent,” Doug Duncan, chief economist of the government-owned mortgage financier, said at a private industry conference last week. “We didn’t necessarily see that as a sustainable [business] model.”
Mr Duncan said that retreating institutional buyers could eventually contribute to a drop in house prices in certain US markets, if they begin selling off their property portfolios at the same time that housing builders begin to ramp up their activity.
Although new construction remains well below normal levels, the hope is that building will pick up pace as the US economic recovery gains momentum.
“The investors have provided a very valuable service in helping transition these properties,” Mr Duncan said. “Will they find that their returns are maximised and it’s time to exit at the same time that the builders hit their stride?”
Others believe this concern is misplaced.
Tim Costello, chief executive of Builder Homesite, a consortium of US homebuilders said: “Homes are slow to move as an asset class so it would be very unusual to see a flood of them all at once.”
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“Also, in total, the available inventory of investor properties which might be sold is fairly small in comparison to the size of the market,” he added.
David Crowe, chief economist at the National Association of Home Builders, echoed Mr Costello. Even if investors do decide to sell, he said, buyers are likely to be lining up as strong rental demand is expected to continue.
“If prices slip too much, the investors will stop selling anyway,” he added.
Companies including Blackstone, the private equity giant, Colony Capital and a long list of real estate investment trusts have spent about $20bn acquiring 150,000 distressed properties, according to estimates from KbW analysts.
The companies have already begun to slow their purchases in the face of 20 consecutive months of rising house prices.
Mr Duncan is forecasting the housing recovery to continue in 2014 and contribute to a greater proportion of US economic growth thanks to new homebuilding activity.
Mr Duncan said: “If the building activity is strong and comes to market at the same time that investors say they’ve gotten the return they wanted and put the property back to market, you could see some price declines.”
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