Fears of another real estate crash are on the rise. Here’s how billionaires George Soros, John Paulson, and Lee Ainslie are taking the fear-mongering all the way to the bank…
“If prices keeps going up at this rate for another six months, we will have a bubble, and people will get hurt.”
That’s a rather discouraging statement from Dean Baker, co-director of the Center for Economic and Policy Research.
And quite frankly, a bit inaccurate in my opinion.
As mainstream media continues to bombard us with stories of buying frenzies and multiple offers driving up real estate prices – a bearish outlook seems to be developing among investors.
But what’s fueling all this pessimism in the first place?
An article in Bloomberg stated that the current buying spree in the US is the result of “…the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes.”
On the surface, all these factors appear to make sense. But upon further examination…one of these is true, one is false, and one is practically insignificant.
Where the media is dead-on is inventory scarcity.
The supply of homes for sale across the US remains tight.
According to the National Association of Realtors (NAR), the number of homes listed on the market is down 16.8% from last March.
And the problem is not just in specific regions. 135 out of 146 markets tracked by NAR saw year over year declines.
A shortage of homes combined with a buyer glut is the perfect recipe for a buying frenzy…but that hardly constitutes bubble territory.
For one, the idea that the Feds are pushing borrowing costs down is no longer the case.
In fact, a 30-year fixed rate mortgage has just climbed to its highest level in seven weeks.
Moreover, the Feds have been openly debating a possible exit strategy from QE3.
If this proves to be true, the end of quantitative easing could mean a surplus of mortgage-backed bonds flooding the market, leading to higher bond yields.
And as yields rise, so do mortgage rates.
To be fair, lending rates are still near historic lows. But so long as rates are rising, affordability will be increasingly impacted.
And it’s not just higher rates that will keep the lid down on the buying spree – banks are making it harder to obtain mortgages altogether.
In a recent survey of lenders, the Federal Reserve concluded that over 30% of banks will not consider approving applicants with a FICO score in the 620 range.
The NAR says that about 57% of approved applicants have FICO scores above 740, compared with 45% in 2005.
Second of all, while Wall Street is indeed moving funds into the real estate realm (research firm Preqin indicated over $22 billion in Q4 2012), their share of the action is hardly enough to drive this so-called bubble.
Based on the NAR’s adjusted annual rate of 4.97 million sold homes and the median sale price of $192,800 in April, the inventory would be valued at nearly $960 billion.
That means Wall Street’s purchases would account for less than 2.3% of the total market…hardly a drop in the bucket.
So after dispelling these inflated myths, how can investors profit?
Instinctively, many would consider turning to the more obvious opportunities such as homebuilders, building suppliers, or home improvement stores.
But if you find that even your mailman is suggesting that these sectors are your best bet during the housing recovery…sadly, the ship has left the dock months ago.
Instead, you may want to take a good look at one of the hardest hit sectors during the financial crisis: mortgage insurers.
You see, mortgage insurers help protect losses when homeowners default on their loans and foreclosures are unable to recoup costs.
However, when the housing market plunged in 2007, millions of homeowners defaulted – and mortgage insurers had no choice but to pay out…big time.
As a result, a number of insurance firms were wiped out while those that managed to hang on are still being hampered by junk debt to this day.
But with home prices showing signs of improvement and rumors of our government pulling the plug on QE3 swirling, investors are gaining confidence.
Add to that, loan delinquencies have fallen to the lowest level since 2008 according to a recent report by Moody’s Investors Services.
Contrarians are excited. And you should be too.
But don’t take my word for it. Why not ask some of the billionaires who have jumped right into the junk tank?
Since the start of 2013, hedge fund giants John Paulson of Paulson & Co., Lee Ainslie of Maverick Capital, and George Soros of Perry Capital have amassed tens of millions of shares in MGIC Investment Corp. and rival insurer Radian Group Inc.
And for good reason.
After losing 29% in 2012, shares of MGIC rose 86% in Q1 2013. And having already tripled its gains last year, Radian shares have surged a further 75% in Q1 2013.
Since the crash, these companies have been more diligent with the quality of mortgages they are insuring.
And with a fresh injection of cash, they have effectively replenished the capital that was paid out after the recession hit…giving them a relatively fresh start.
While the recovery is far from complete, smart money is betting that a second housing bubble highly unlikely.
So where will your money go?