While there are still many pockets of weakness in the housing market, there are now some positives beginning to emerge. We've seen plenty of companies reporting that the higher end of the housing market is certainly rebounding strongly. Last week, Toll Brothers, Inc. (NYSE/TOL) reported quarterly earnings that were the highest since 2008. The company's CEO stated that it is currently seeing the most sustained demand since 2008.
Many are worried about the market sentiment for the lower end of the sector, the distressed housing market. With millions of homes left to be foreclosed, will prices continue to drop? It appears not, as investment funds are scooping up real estate at an exceedingly fast pace.
RealtyTrac Inc. reported that the prices of homes in the process of foreclosure are seeing the biggest annual increase since 2006. In a related story, Bloomberg interviewed many in the housing market industry who essentially said that there is not enough supply in many markets, which is pushing up market sentiment and prices. Market sentiment is clearly shifting in the housing market; the key point is that it's not coming from the individual home buyer. This is where many analysts are getting it wrong, looking at such metrics as consumer confidence. Most of the buying is actually coming from institutions, large investors, and hedge funds.
One of these funds is The Blackstone Group L.P. (NYSE/BX). The Bloomberg article noted that Blackstone, along with several other funds, is planning to deploy several billion into the housing market. The way funds work is that, if they see firms making money, other funds will step into the space. Firms like Blackstone are the leading-edge funds in the housing market, and you can bet that many other funds are now thinking about jumping into this market sector. This will add even more positive momentum to the market sentiment of the housing market.
The hedge-fund sector has almost $2.0 trillion in assets under management. While not all of that will obviously move into the housing market, you have to remember that, with the current yield of renting as compared to U.S. treasuries, the housing market is looking like a great return. Market sentiment can shift for many reasons. With the yields so low, funds need to find ways to increase yield. If they can buy 500 homes and make several multiples in excess of treasuries, some might want to allocate a portion of their assets to the housing market. This creates more positive market sentiment, as the assets now appreciate in price.
Chart courtesy of StockCharts.com
Blackstone is an extremely diversified manager of capital. It does have a good dividend yield of 2.9%, but its income can vary greatly. One should be careful when investing in such a name, because it can be hard to discern all of its holdings. Market sentiment, however, seems to be shifting to the positive for many of the company's holdings, including those in the housing market.
This does not mean we will return to the housing market of 2006. In fact, it means the complete opposite, as these investments are strictly based on good, solid math. The previous boom was geared to individual homeowners gambling on higher prices, as opposed to the current calculation of comparing yields among different investments. Insofar as long-term bonds remain with low yields, you will see additional assets flow into the housing market and maintain a positive bias in market sentiment. It won't be a booming bias, but a stable level of demand for excess supply in the housing market.