- The new drivers of the current housing price cycle
- Why investment capital, not normal household formation, has become primary for pricing
- What the implications of an investment-driven housing market are
- Why prices will fall & what homeowners (residents & investors) can do now
The The New Drivers of The Current Housing Cycle
First, we are currently seeing something in residential real estate markets that has not occurred in our lifetimes – the magnitude of all-cash offers. 40-50% of residential real estate purchases have been for cash in recent years. This phenomenon has no precedent in recent economic history. Why is this happening? We need to remember that a primary goal of the Federal Reserve in setting short term interest rates near 0% was to induce investors to buy “risk assets” – think real estate and common stocks. By eliminating rate of return in safe securities such as Treasury bonds, CD’s, etc., the Fed essentially forced formerly conservative investors to purchase higher risk assets in order to get any acceptable rate of return.
In good part, the all-cash offers are coming from investor’s intent on buying to rent. Intent on obtaining an acceptable cash on cash rate of return as yield can no longer be found in safer investments. This crosses the boundaries between investors in the asset accumulation phase of life and retirees starved for yield, draining formerly CD-centric bank accounts in order to purchase income-producing rental properties…