[Do The Math] Here Comes Another Asset Bubble?
Posted by Jonathan J. Miller -Tuesday, June 29, 2010, 1:10 AM
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A great article in Multifamily Executive (hat tip) seems to hit the nail on the head:
Multifamily Acquisition Market Heats Up as Cap Rates Fall
The acquisition market has been gathering steam in the second quarter, with cap rates declining nationally and the gap between buyers and sellers narrowing.
For the last two years, the typical sellers seemed to be only those who had to sell. And the perception that rents and values will escalate two years from now has kept many owners who bought at the height of the market from listing their properties.
But among longer-term holders, there’s been a shift in attitudes in the past 90 days. The bidding on high-quality assets has become so frenzied that owners are beginning to ask themselves if now really is such a bad time to sell.
We are already seeing this on an individual apartment and single family home basis, with investors comprising the lion’s share of the purchase activity for speculative purposes. Record low mortgage rates and a precipitous drop in housing prices made the purchase decision pretty easy.
Economically speaking, nothing has changed in a meaningful way in the short term, although the consensus seems to be that we are going in the right direction.
After raising fresh capital over the past 18 months from investors hungry to recoup their losses of the past few years, funds looking to invest in multi-family and distressed assets have been waiting on the sidelines afraid of their own shadow, looking for the right time to make a move. But the problem is, everyone seems to be doing it at the same time and they seem to be more concerned about what their colleagues are doing rather than the fundamentals.
That’s because investors want their money working for them and are tired of waiting for the fund managers to get in the game so to speak.
The surge in SFR and condo sales activity nationwide as a result of the tax credit, sharp declines in prices and rising foreclosures are bringing more affordability and falling borrowing costs to the housing market. It’s not clear whether this can be sustained. If this level of activity can be, I’m not sure how to do that math.
This “happy” real estate news for the past 6 months has played a role in the new unbridled optimism by fund managers looking to acquire multi-family and distressed assets and are under pressure from their investors and who don’t want to be left behind.
Our commercial group Miller Cicero is seeing this sentiment first hand when speaking with investors.
It feels like the beginning of a new asset bubble because the math simply isn’t there. There are a lot of smart analysts punching key strokes on their HP12c’s trying to do the math.
Of course they don’t seem to know how to do the math and in a bubble, that’s besides the point.
