Housing prices appear strong on the surface
On the last Tuesday of each month, the S&P/Case-Shiller Home Prices Indices are released. Based on the most recent release of this information, average U.S. residential home prices have increased approximately 8.1 percent over the past 12 months.
Driven by a combination of persistently low mortgage borrowing rates, moderately improved unemployment rates and a reported scarcity of supply, the increased demand for the average residential home is pushing prices upward. Additionally, family formation rates are recovering from the downturn experienced during the recent recession.
Leading the price recovery over the past 12 months are areas such as Phoenix, San Francisco and Las Vegas. Case-Shiller reports these areas have seen price increases of 23 percent, 18 percent and 15 percent, respectively, over the past 12 months. Some of these locations are also areas that suffered some of the greatest price declines several years ago.
A material portion of the overall demand for existing residential housing units is being driven by institutional buyers. Some estimates indicate as much as 20 percent to 30 percent of residential home purchases over the past couple years have come from various types of institutional buyers.
Generally, these buyers are investing on behalf of others who have contributed to collective pools of investable cash. These buyers are purchasing groups of residential homes across a range of locations with the intent of renting these properties for several years. Assuming the rent proceeds can meet or exceed the ongoing costs of maintaining the home, paying taxes and other costs, the institutional investor is betting the price of the home will appreciate during the next several years and a meaningful profit can be realized at the time of the future sale.
Demand for residential real estate from these pools of investable funds is likely resulting in a portion of the reported increase in the U.S. housing market prices. At some point, these funds will desire to harvest the anticipated gains in their residential holdings and move on to other more attractive investments and provide a return to their investors. A mass exodus of these institutional investors could pose a risk to U.S. residential home prices in the future.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.