Influx of Wall Street and Foreign Cash Soaking up Supply, Bolstering Demand

What’s the latest fad for the Wall Street jet-set? Simple, start a company and buy up many thousands of American homes in short sale or foreclosure and then rent those homes out for a handsome profit, while selling shares of the business to investors as a means of even more profit and to raise seed money to purchase even more properties. Why should anyone care though? After all, taking those distressed properties off the market is a good thing, right? The answer is that while taking foreclosures off the market may help other struggling home owners in the short term, this practice holds many perils for the economic future and prosperity of our nation. While speaking of real estate fads, foreign investment in real estate has risen to new heights, as Chinese citizens seeking the stability and prosperity that America has to offer buy homes in the United States. While these factors would tend to exert an welcome upward pricing pressure on the national housing market, concerns persist as to how stagnant middle class wages and slow economic growth can possibly support such robust (often all-cash) investment-driven home price increases.

Wall Street Money Buying 100’s of Thousands Of US Homes, Skewing Supply & Demand

One of the largest factors impacting the housing market is persistent low inventory of available homes for sale. Aside from foreign investors, American financial firms backed by Wall Street money have been buying up thousands of foreclosure and short sale homes across the country. These institutional buyers are paying all cash and then using these homes to derive rental income, and more money from selling shares of their interests to eager investors. This combined with wealthy private cash buyers may be at least partly responsible for the chronic dearth of available properties from which buyers can choose. Prices seem to still be appreciating perhaps due to slackening demand balancing out the reduced numbers of short sale and foreclosure distressed sales. Further illustrating the sway that institutional buyers and deep pockets hold over the housing market, at some points in the recent housing recovery as many as 50% of home sales have been all cash transactions (according to Forbes.com ). Financial think-tanks and investment pundits have already started rumbles of this institutional purchasing of residential real estate may be laying the foundation for the next “Housing Bubble 2.0”. With such a large percentage of homes being purchased by Wall Street billions, it does beg the question as to what home values would be without this aggressive profit-seeking.

Heavy Wall Street investing in the residential housing sector is problematic on many front, not the least of which is the fact that aggressive Wall Street practices fueled the last housing bubble. All desires for record profits aside, at the end of the day a residential home has little value outside of being a place for people to live. Perhaps it is time for congress to step in and break up these nascent real estate oligopolies, before the American Dream is supplanted by Wall Street robber-barons who are using the financial crash as an opportunity to turn our nation’s middle class into little more than renting-paying serfs living on the fiat of the wealthy few.

In Wake Of Recession, Wealthy Chinese Seek To Purchase American Dream

China has become the biggest foreign spender in US real estate, whose recent purchases now surpass 22 billion dollars. Reasons for the huge influx of foreign capital include factors such as lower US prices when compared to booming areas within China among other factors such as wealthy Chinese citizens looking to diversify their assets (not long ago, government seizure of real estate was a fear that became a reality for many in that country, CNN Money Reports). For other Chinese citizens, a second home to use for vacations and as a part time rental adds convenience as well as the incentive of possible home value appreciation. For the pragmatists, simply buying a condo for their child to live in while attending college in the United States makes too much economic sense to pass up. Paving the way, several real estate investment groups have begun offering catered events in China wherein they market American homes for sale toward eager-to-invest wealthy Chinese citizens where attendees can write offers or bid on properties sight-unseen, right on the spot. These real estate fairs have become a popular avenue for those with the funds to connect with homes in popular areas within the United States housing market. And, while this is certainly helping out the many Americans still struggling with reduced and/or negative equity in the wake of the Great Recession, there are concerns that the influx of money may be driving up prices faster than the slower-than-expected American economic recovery can sustainably support.

Although Canada still beats out China in the gross number of American homes purchased during the most recent 12 month period for which we have data, China handily wins in terms of the amount of money spent. With Chinese investors favoring affluent areas in California and Florida topping the list. Not only this, but the majority of these home purchases have been made in all cash at closing. Sky-high prices in China and Hong Kong combined with a desire for a part of the rights and legal rights that come with property ownership in the US have understandably increased the desire to diversify.

Further Reading on International Home Buying

A Nation Of Tenants & The Decline of The Middle Class

With so much cash being pumped into the US housing market many are concerned that the American middle class will no longer be able to afford to purchase a home. As a harbinger of the last housing crash bearing a faint scent of Tulip-Mania, entry-level homes were being purchased and sold at prices that were out of reach for most Americans. And, when a customer base can no longer afford to buy a product the market quickly hyperventilates and crashes. It is a fact that all healthy economies experience growth and recession phases to maintain their balance. However, the fever-pitch of profit-seeking speculation may magnify the housing market’s normal ebb and flow into another hurricane of foreclosures, short sales and crashing prices. Furthermore, increased buying pressure as a result of cash-flush foreign markets could be the straw that broke our Wall-Street-weakened economy’s back.

Foreign Investors, Wall Street Buying US Homes
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