The recent drop in housing starts suggest a slowdown in home builders’ activity in the past month. This slowdown could reflect in the coming quarterly reports of D.R. Horton, Inc. (NYSE:DHI) and NVR, Inc. (NYSE:NVR). Moreover, if the Fed reduces its asset-purchase program the demand for housing is likely to fall, which will also weigh on the future revenue growth of these companies.
But is this recovery driven by Wall Street?
Home builders aren’t the only companies that benefited from the sharp rise in the housing market: Investment companies such as The Blackstone Group L.P. (NYSE:BX) also show sharp gains: The company’s revenue grew by more than 30% in the first quarter of 2013 (year-over-year); its operating profitability also spiked from 17.7% in the first quarter of 2012 to 33% in the first quarter of 2013. Most of the growth in revenue is due to the rise in The Blackstone Group L.P. (NYSE:BX)’s real estate investments.
Blackstone has purchased more than 26,000 single-family houses in nine states including in Arizona and Nevada – states that suffered severely in the recent housing crash. The company has been renting out these apartments. The rent index rose in the past year by 2.7%. This increase reflected in the rise in the company’s revenues in real estate. But if the housing market slows down and rents dwindle, The Blackstone Group L.P. (NYSE:BX)’s growth in revenue will similarly weaken.
Based on the above, the company could be among the driving forces behind the recent rise in home sales. On the other hand, the recent drop in mortgage applications could suggest fewer people are purchasing homes. In such a case, perhaps part of the rise in the housing market is driven by investment companies and not actual demand for homes by families. This scenario could lead to a bubble-burst down the line. In turn, investment companies such as The Blackstone Group L.P. (NYSE:BX) will suffer from such an event.
Take away
The drop in demand for mortgages and rise in mortgage rates suggest the rise in the housing market is less driven by private buyers and more by real estate investors such as The Blackstone Group L.P. (NYSE:BX). The sharp recovery of the housing market might reach a halt if and when the Federal Reserve starts tapering its current asset- purchase program. If the sharp recovery in the housing market slows down, many home builders and investment companies in real estate will be adversely affected from this development.
The article Is Wall Street Behind the Housing Rally? originally appeared on Fool.com and is written by Lior Cohen.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Lior is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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