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PulteGroup, Inc. (PHM), The Blackstone Group L.P. (BX), Colony Financial Inc (CLNY) & The Housing Rebound: It’s Not What You Think

The housing sector’s slow recovery appears to be gaining ground, and homebuilders like PulteGroup, Inc. (NYSE:PHM) The Ryland Group, Inc. (NYSE:RYL) 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.

PulteGroup, Inc.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 The Blackstone Group L.P. (NYSE:BX) and Colony Financial Inc (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 Trust Corp (NYSE:SBY) and Altisource Residential Corp (NYSE:RESI), two trusts that were spun off earlier this year from parent companies Two Harbors Investment Corp (NYSE:TWO) and Altisource Portfolio Solutions S.A. (NASDAQ:ASPS), 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%.

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