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IS HOUSING IN BUBBLE TROUBLE?

Investors have been scooping up homes to rent or flip. Sound familiar?

PATRICIA MERTZ ESSWEIN

ANDY MCMILLAN/REDUX

Mark Vitner is a managing director and senior economist for Wells Fargo. He tracks trends in inflation and the U.S. housing markets, commercial real estate and regional economies.

The housing market nationally is well into recovery, with home prices rising strongly. Is another bubble inflating? I am surprised at how much speculation has returned to an economy that paid such a heavy price for it not long ago. We have private-equity funds that have never owned or managed real estate rushing to buy homes because they have a potful of money — at least $10 billion by my count — and feel opportunity will pass them by if they don’t buy right now. They hope to turn homes into rentals that they will eventually flip and sell.

What’s the problem with that? Investors seem to be overpaying for these properties. They’ve driven up the prices of foreclosures so much that it’s hard to see how they will ever make a profit on them. They’re outbidding prospective owner-occupants for homes that are more desirable than those that usually end up as rentals. When they run out of existing homes to buy, in some cases they’re buying new homes at full retail price. They’ve pushed up home prices much faster than the economy’s meager improvement so far can justify.

What are they betting on? We had a tremendous surge in renters when the financial crisis started. Investors are betting that demand will continue because it’s hard to get a mortgage, say, or because young people prefer to rent. But in my view, the trend toward renting was mostly tied to the uncertainty of the financial recovery, and I think that story may have played out already.

So, will this result in Bubble 2.0? I wouldn’t call it that, but I do think home-price gains will top out soon and slow down later in the year. If the private-equity funds can’t produce income from the rental or sale of these homes, they’ll have difficulty attracting new investment dollars. When those dollars slow down or stop — and that could happen soon — home prices will hit an air pocket and come back down a bit, and that will be a setback for the economic recovery.

What’s your advice for sellers or buyers? It’s a good time to sell. Increase your asking price and expect full-price offers. If you don’t get them, just say no and wait for a better offer. For buyers, it’s not worth getting into a bidding war with investors for a home. You’ll always find another house to “absolutely love.”

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