March 25, 2013 at 10:38 AM EDT
Institutional Investors Increase Their Home Buying Activity by 50%

Institutional Investors IncreaseI may be the only one saying it: the rise in the U.S. housing market doesn’t look sustainable.

One of the most critical components of the housing market I follow is first-time home buyers. Why? As I have said many times in these pages, they are the ones who promote economic growth by increasing consumer spending after they make a home purchase; they buy furniture, appliances, audio/visual electronics, and more to fill the homes they buy.

Looking at the existing U.S. home sales for February, I see first-time home buyers accounted for only 30% of purchases in the housing market—that’s 6.25% lower than the number of first-time home buyers one year ago, in February of 2012. (Source: National Association of Realtors, March 21, 2013.) Until first-time home buyers pour into the housing market, I don’t expect it to go much further in terms of price increases.

With that said, the question arises: who is actually buying the homes and causing home prices to start increasing? According to the National Association of Realtors (NAR), the national median home price for all housing increased 11.6% to $173,600 in February of 2013 from last February.

Home prices have increased for 12 consecutive months now. They haven’t been big increases, but the last time the U.S. housing market witnessed this many consecutive months of price increases was from June 2005 to May 2006.

The reality is that it’s the investors who are buying up homes right across America.

While the number of first-time home buyers declined in February, investors accounted for 22% of all the existing homes purchases in the U.S. housing market. In January, they accounted for only 19%.

According to a report by JPMorgan Chase & Co. (NYSE/JPM), institutional investors are looking to invest $10.0 billion in the housing market in an effort to rent the properties out for income. (Source: USA Today, January 22, 2013.)

The recent Market Pulse report by CoreLogic says institutional investors increased their buying activities by more than 50% in 2012—they bought houses in major cities, like Phoenix, Las Vegas and Los Angeles. (Source: CoreLogic, March 18, 2013.)

The average American consumer hasn’t come back to the housing market, as they are struggling—facing higher food and gas prices and lower real disposable income.

It’s the big institutional investors buying homes to rent and not the end-user home occupant; a housing recovery will not sustain itself in the long term under such a scenario. Consider Phoenix, Arizona, for example, where the so-called housing market “recovery” is robust. In 2011, institutional investors purchased 16% of all the homes sold. By 2012, they purchased 26% of all homes sold.

It isn’t rocket science; when investors are running to the housing market, and buying with two hands, the supply will decrease and the prices will obviously increase. My question is: what happens when their returns diminish (as home prices increase further) and these same institutional investors try to exit the market?

The activity in the housing market is artificial.

Michael’s Personal Notes:

While the mainstream focuses on the smallest nation in the eurozone, Cyprus, I am concerned about the overall health of the global economy. The reality is that progress in the global economy is slowing down with major economic hubs struggling.

Dear reader, Cyprus will eventually get a bailout. We have already seen countries like Spain, Portugal, and Greece each receive a significant amount of loans to keep their countries afloat. Why would Cyprus be any different?

But aside from Spain, Portugal, Greece, and Cyprus, when I look at the remainder of the global economy, I see a recession emerging. Demand is simply declining in the global economy—which I believe will lead to a recession.

Look at China: the Chinese economy is expected to grow at 8.1% in 2013 and eight percent in 2014. In 2012, the country grew at the slowest pace in 13 years. (Source: The Sydney Morning Herald, March 20, 2013.) But I believe the growth forecasts for China are overly optimistic.

The Chinese Customs Administration reported that the country imported only 56.4 million tons of iron ore—the main ingredient for steel production—in February 2013, compared to 65.5 million tons in January. This represents a decline of almost 14%. Steel production in China gives us an idea about the health of the global economy.

According to Citigroup Inc. (NYSE/C), steel demand in China was only 2.1% in 2012, compared to 20% in 2010. Keep in mind that China is the biggest producer of steel in the world!

Similarly, the Japanese economy—a well-known exporter in the global economy—is facing hardship, too, as its exports decline and the country is back in a recession.

The eurozone, one of the major hurdles for economic growth in the global economy, continues to be in severe distress. It’s not only debt-infested countries that are struggling, but stronger nations like France and Germany are begging for growth now, too.

On the other side of the global economy, Brazil is facing economic scrutiny as well. According to the country’s central bank, Brazil’s trade deficit in February was $1.3 billion, compared to a surplus of $1.7 billion in February of 2012.

These are just a few hints of how sick the global economy really is.

For us here at home, a recession in the global economy will further weaken the U.S. economy, as 40% of American-based S&P 500 companies that derive sales from outside the U.S. face mounting pressure for earnings growth. Once big U.S. companies start suffering, it’s all downhill from there for the U.S. economy.

Where the Market Stands; Where It’s Headed:

The stock market is overbought, with far too much optimism amongst stock advisors and investors. Corporate insiders are at their most bearish level since the late 1990s. (See “Corporate Insiders Most Bearish in 14 Years.”) Corporate earnings growth will be negative again this quarter, the second time that’s happened in the past three quarters. The VIX is at its lowest level in years (see “Fear Index Says This Stock Market Reminiscent of October 2007), and the U.S. economy almost had negative growth in the last quarter of 2012.

I’m sitting back, just waiting for this market to fall.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi, Profit Confidential, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

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