Colony’s Tom Barrack Sees Bubble in U.S. Housing Market

Colony Capital LLC’s Tom Barrack said U.S. homes are in danger of becoming overvalued as low borrowing rates and an improving labor market fuel demand.

“We have asset bubbles for sure and asset bubbles are necessary when you don’t have growth” in the economy, Barrack, Colony’s founder and chairman, said today in an interview at the Bloomberg Doha Conference. “If you go to new homes, the builders have to buy lots, so the next stage we are going to see is a land boom.”

Federal Reserve Chairman Ben S. Bernanke’s efforts to bolster the U.S. economy by buying mortgage bonds and pushing down borrowing costs has fueled demand for home purchases amid a tight inventory of properties for sale. Bernanke and his colleagues on the Federal Open Market Committee, who have held interest rates near zero since December 2008, last month pledged to press on with $85 billion in monthly bond purchases even as some Fed officials called for scaling back the record stimulus.

The S&P/Case-Shiller index of house prices in 20 U.S. cities rose in January by the most since June 2006, the group said March 26. JPMorgan Chase & Co. last month more than doubled its forecast for U.S. home-price gains this year to 7 percent, while Bank of America Corp. predicted an 8 percent jump as rising buyer demand combines with a shortage of inventory.

Photographer: Jonathan Alcorn/Bloomberg

Colony Capital LLC founder and chairman Tom Barrack, said the economy “has asset bubbles for sure and asset bubbles are necessary when you don’t have growth.” Close

Colony Capital LLC founder and chairman Tom Barrack, said the economy “has asset... Read More

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Photographer: Jonathan Alcorn/Bloomberg

Colony Capital LLC founder and chairman Tom Barrack, said the economy “has asset bubbles for sure and asset bubbles are necessary when you don’t have growth.”

Mortgage Rates

The average rate for a 30-year U.S. fixed loan last week was 3.54 percent and reached a record-low 3.31 percent in November, according to Freddie Mac. The supply of homes for sale rose in February after dropping to a 12-year low the previous month, data from the National Association of Realtors show.

Colony Capital is among the private-equity firms that are buying U.S. homes in bulk after prices fell by a third from their July 2006 peak. The Santa Monica, California-based firm has raised $2.2 billion to purchase properties with a plan to rent them out.

Colony doubled the size of its portfolio during the quarter ended Dec. 31, to 5,405 homes, and has increased the number to 7,000, Richard Saltzman, chief executive officer of Colony Financial Inc. (CLNY), Barrack’s real estate investment trust, said on a March 7 earnings call.

Below Peak

The Case-Shiller index is still 29 percent below its peak. Very few areas have approached levels near the height of the market, Wilbur Ross, chairman of WL Ross & Co., said today in an interview at the Doha conference.

“The loan-to-value ratio is more conservative than back then, prices are lower and with the low interest rates, housing is more affordable,” he said.

Graphic: Bloomberg Visual Data

Graphic: Bloomberg Visual Data

Rising prices have helped lift underwater homeowners, or those who owe more than their property was worth, into positive equity, Barrack said today. Those people are now able to refinance mortgages at lower rates, reducing monthly payments and helping to bolster the economy, he said.

“What’s happened in the last year is that real values have accreted up so that they can refinance,” Barrack said. “Then the wife feels good about buying a new refrigerator. Dad goes out to buy a car. Everybody feels better but nothing has happened other than the Fed hitting its keyboard.”

Dallas Fed President Richard Fisher said last month that he’d like the U.S. to reduce its mortgage-backed security purchases program amid signs that the economy will probably grow at about 3 percent by the end of the year.

“We have a pretty robust housing situation right now,” he said at a conference in Abu Dhabi.

U.S. job growth slowed in March as employers hired fewer workers than forecast, the Labor Department reported last week. Payrolls rose by 88,000, the smallest gain in nine months, after a revised 268,000 February increase. The jobless rate fell to 7.6 percent from 7.7 percent as the labor force shrank.

To contact the reporters on this story: Robert Tuttle in Doha at rtuttle@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net; Dale Crofts at dcrofts@bloomberg.net; Andrew Blackman at ablackman@bloomberg.net

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