Headline on the first page of the business section of the New York Times: "Big Money Is Betting On Housing Rebound".
My question is: If big money is betting on the housing rebound, is it already too late for other money to get into this game and increase their wealth as well?
Absorb this: "A flurry of private-equity giants and hedge funds have spent billions of dollars to buy thousands of foreclosed single-family homes. They are purchasing them on the cheap through bank auctions, multiple listing services, short sales and bulk purchases from local investors in need of cash, with plans to fix up the properties, rent them out and watch their values soar as the industry rebounds."
And this: "The Blackstone Group, the New York private-equity firm run by Stephen A. Schwarzman, has spent more than $1 billion to buy 6,500 single-family homes so far this year. The Colony Capital Group, headed by the Los Angeles billionaire Thomas J. Barrack Jr., has bought 4,000."
Who else is into this? Housing is picking up. The mortgage-backed securities market is a contributor to this pickup. And, guess what, who is benefiting? You guessed it, JPMorgan Chase (JPM) and Wells Fargo (WFC).
And people are already making money in the housing market: Freddie Mac has recorded its second quarterly profit in a row in the third quarter and paid the Treasury a $1.8 billion dividend. Furthermore, it maintained its capital level at $4.9 billion. Fannie Mae also posted a third quarter profit of about $1.8 billion and paid the Treasury a dividend of $2.9 billion, its third quarterly dividend in a row.
Opportunities are seemingly there. And, the Federal Reserve is underwriting this pick up. I have written for at least two years now about how the actions of the Fed and the periods of quantitative easing can create market opportunities to make money. And now, there seem to be "deals" all over the place.
Housing prices are up for the third month in a row, housing rents are up, and housing construction seems to be increasing.
The problem with taking advantage of these opportunities is always one of timing. If you are the only one who commits to these opportunities, you may be left holding the bag. So the rule is don't get into the action too soon. You may find an opportunity to make a lot of money, but if no one else realizes what you do, you may be holding the opportunity for a long time before anything is realized… if it ever is. So get in when others seem to be acting.
Well, others seem to be acting!
But, the problem on the other end, however, is getting into the market too late: "In order to really make money, you need to be in on the early end of the bubble, and not at the end. In the early stages, substantial economic profits can be made. At the end, however, everybody is "chasing their tail" trying to earn the extra buck, and all the economic profits have been competed away."
Usually the "big money" gets in first and "makes a ton."
Then when others realize how much money is being made they get into the market. And, then others and so on and so forth.
The New York Times article discusses David Miller, a former member of the Obama Treasury Department who worked with the Troubled Asset Relief Program, TARP. Now, Mr. Miller is on the other side of the table. Mr. Miller now works for Silver Bay Realty Trust of Minnetonka, Minnesota, a subsidiary of Two Harbors Investment Group, a publicly traded mortgage real estate investment trust. Two Harbors is, according to the article, obtaining huge stakes in the housing market. It is buying actual homes and placing the homes in Silver Bay. Silver Bay is to be spun off into a separate entity, a publicly traded REIT. The new company will combine the portfolio of Silver Bay and an organization called Provident Real Estate Advisors, which has a portfolio of 880 properties.
Things are happening and the effort is spreading.
So, more and more players are entering the housing market. Seemingly there is a lot of money to be made.
The question is, how much time is left to take advantage of some of these opportunities?
Well, the Federal Reserve continues on with its quantitative easing. It seems to be underwriting this whole bubble that is evolving. And, with economic growth so tepid and unemployment as high as it is, the Fed is likely to continue to stay "easy" for a substantial amount of time. At least, they "talk" this story.
And, the housing market is not robust, yet, even though improving. Residential real estate investment in the United States is still only a little about 50 percent of the peak level reached in the third quarter of 2005. Housing starts, although picking up, are still only a fraction of what they were before the financial collapse. Twenty-five percent of homeowners still find the market value of their homes below the outstanding amount of their mortgages. And, since 2008, it is estimated that 3.9 million families have lost their homes due to foreclosure.
So, it seems as if we are still in the early stages of the next housing bubble. So, it seems as if there are still plenty of opportunities available in purchasing homes for resale, for mortgage originators, for mortgage bundlers, for dealers in mortgage securities and for investors in mortgage-backed securities.
The Fed, it seems, is trying to line the pockets of people who operate in the housing area. There are many critics that are unhappy with the way the income/wealth distribution in the United States has become more skewed toward the wealthy over the past fifty years. It seems, at least at this stage of the next period of credit inflation, that the Obama/Bernanke efforts to get the economy growing more rapidly and to reduce the unemployment rate are going to make the income/wealth distribution even more skewed toward the rich. The law of unintended consequences continues to work.