You are right that there is healthy end-consumer demand that has been unable to compete with the investor demand. But the reason they are FHA buyers is because they (usually) are having a difficult time coming up with the ~20% down payment on these homes. These aren’t the kind of people who are able to get into ridiculous bidding wars, which is why they’ve been losing to the investors as of late. While it’s certainly possible, and desirable, that the job market for these buyers will be getting stronger in the future, I’m not seeing anything on the horizon to indicate more and better-paying jobs for the general population.
As for there being a virtuous cycle, I’m not of the belief that buying and selling existing homes increases general wealth because for every winner/seller, there is a loser/buyer with an equal amount of debt, plus interest, that will reduce demand and economic growth going forward.
The existing housing market is a Ponzi scheme that requires an ample supply of new entrants at the bottom of the pyramid in order for the rest of the market to be pushed up. In our increasingly bifurcated economy with a tiny upper class with increasing wealth, a shrinking middle class being pressured by increasing costs of basic necessities, and a growing lower/lower-middle class that is steadily losing ground, I’m not sure how the housing market will strengthen unless we make significant concessions in our living habits and become more like those in developing nations where we house more and more people in smaller and smaller spaces (entirely possible, and something we’re already seeing, BTW).
For as long as interest rates are suppressed at these levels, there will likely be fairly strong investor involvement in the housing market. What should be concerning to those who want to see higher housing prices in the future is the 5-7 year disposition plans that these large funds have (and many banks who’ve been holding off on foreclosures). This will also coincide with more Baby Boomers entering a stage where they realize their pensions/retirement accounts won’t be able to sustain them over the years, and they, too, will be looking at liquidating their houses in order to provide cash for living expenses.
If interest rates rise, the investors making 5-10% the hard way (and I think they are underestimating what it will cost them to maintain these rentals) will want out of these funds. Will the funds be forced to liquidate their inventory if this happens? All at the same time? With higher interest rates, new owner-occupant buyers will also be willing to pay less for the same properties at the very same time that these investors are looking to exit. Sure, the investors can hold and accept lower than expected/desired returns, but there are weaknesses in these plans that many people aren’t acknowledging, IMHO.
Something for these new landlords to think about are the statistics about the percentage of income renters are already paying for rent. It’s unlikely they’ll see rising rents over the years (assuming foreclosure numbers continue to dwindle to more normal levels) unless the renters start adding more people per unit…which will increase turnover, late payments/no payments, maintenance costs, etc.
IMHO, this strong housing market is just another symptom of the credit bubble that the central banks and world governments refuse to acknowledge or resolve. I could definitely be wrong, though!
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“Meanwhile wages for the vast majority of workforce renters remain fairly stagnant, setting the stage for a broad affordability crisis. Fifty-three percent of renters now pay more than 30 percent of their household income for their housing, while 27 percent of renters pay more than half. These are both sharp increases in the numbers of cost-burdened households since 2001, when 40 percent of renters paid more than 30 percent of their household income for their housing, and 20 percent paid more than half.
These increasingly unaffordable rents depress demand for goods and services beyond the housing market. One analysis found that lower-income families in unaffordable housing units spend 50 percent less on clothes and health care, 40 percent less on food, and 30 percent less on insurance and pensions compared to families in affordable units.”
