The housing sector's slow recovery appears to be gaining ground, and homebuilders like PulteGroup (NYSE:PHM) Ryland Group (NYSE:RY) recently reported gains in first-quarter revenues and substantial increases in sales prices due to rising demand. The U.S. Census Bureau reported that housing starts for March were well over one million, nearly 47% over that for the same time last year.
Yet, there are worries. Some analysts are concerned that there is a mini housing bubble forming, as prices rise but other economic indicators -- such as unemployment numbers -- resist improvement. What is causing this rally? Two unusual ingredients this time around seem to be fueling the fire: Intense investor activity and artificially low interest rates.
An unusual turnaround
A quick glance at recent unemployment numbers lends credence to the notion that the jobs picture isn't brightening. Despite a dip in the unemployment rate to 7.6% for March, experts note that discouraged job seekers abandoning their search was the cause of the 0.1% slip in the rate from the previous month. The paltry 88,000 jobs created last month was disappointing, representing the lowest rate of job creation since last June.
Another unusual aspect of this so-called recovery is that two historically important types of buyers are largely absent: the first-time homebuyer, and those moving up to more expensive housing. Instead, the market is being moved by investors, loaded with cash and scooping up single-family dwellings at a frenzied pace, driving up prices.
For Wall Street types, single-family foreclosures can be bought cheaply and in bulk, then fixed up and rented. Companies like the Blackstone Group (NYSE:BX) and Colony Financial (NYSE:CLNY) have been very active in this market, with the former purchasing 16,000 homes just last year, and the latter ramping up its own portfolio to approximately 7,000. This new industry has also spawned fresh entrants from the REIT field, Silver Bay Realty (NYSE:SBY) and Altisource Residential, two trusts that were spun off earlier this year from parent companies Two Harbors Investment and Altisource Portfolio Solutions, specifically to take advantage of the boom in the foreclosure-to-rental market.
Big money moves markets
Are investors really fueling this recovery? Some, like former Morgan Stanley analyst Oliver Chang, who left that firm to found an investment fund that buys and rents single-family houses, say "no." But others disagree, like Jeff Pintar, whose company buys up single family homes in California. Pintar told The Wall Street Journal that most homes priced below $400,000 in Orange County are quickly being snatched up by institutional investors.
California was hit especially hard during the housing crisis, as was Florida -- where experts estimate big investors buying up homes constitute 70% of sales in some areas of the state. Locations in other states that saw a high number of foreclosures are also seeing a rebound due to investor dollars. Over the past year, the city of Phoenix, for example, has seen prices rise by 23%, and Las Vegas has reported a jump in home prices of 15%.
The numbers tell the tale
Even those pleasing housing numbers from the government aren't all they seem. Of the 1,036,000 housing starts reported for last month, only 619,000 were single-family homes. By comparison, 392,000 -- more than half -- were multi-families, destined to contain more than five units each.
Doubtless, these apartments will be occupied by young people who are increasingly forming their own households, to the tune of 1.1 million in 2011. Unfortunately, the doubling of the lethargic household formation rates of the 2008 to 2010 recession years hasn't helped housing -- even this Reuters article on the subject notes that most of these persons are moving into rent. With the rates of crippling student loan debt faced by many college graduates these days, buying into the housing market doesn't seem likely any time soon.
Will the housing market collapse as soon as investors decide that prices have risen too much for their taste, and they exit the market en masse? Perhaps. Another concern is that the non-investors currently participating in the housing market because of ultra-low interest rates, courtesy of Federal Reserve policy, will also drop out if interest rates begin to climb. Unfortunately for the housing sector, the components of the current revival don't appear to be the ingredients for long-term success.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.