New Uncertainty in Housing as Investors Seek Maximum Profits
Capital markets hold the key to the future for the consolidating Wall Street landlords, but the path through is downright bloody.January 13
Fresh questions are being asked about the role of investors in the rental market and how their eventual exit may affect the economic recovery.
Small batches of investor-owned properties have trickled into public listings, indicating some investors may be gearing up for larger liquidations, according to Daren Blomquist, vice president at the online real estate company RealtyTrac.
"It is a very big concern for real estate professionals," Blomquist said. "They are asking what the impact will be if investors liquidate directly onto the market."
Institutional investors' presence has played a controversial role in the housing market's recovery, and it has frustrated bankers hoping to see mortgage sales climb. Investors bought at discount several hundred thousand properties after the market bottomed in 2012. Blackstone Group's chief executive, Stephen Schwarzman, has described the rental business as a "bet on America."
The top four investors in single-family homes have booked 23% gains on equity, or about $9 billion in profit, as home prices have rebounded over the past three years. Blackstone's Invitation Homes, the largest investor landlord, with 46,000 homes in its portfolio, has so far booked gains of $523 million, according to RealtyTrac.
"The recent concerns that institutional landlords could begin liquidating their rental portfolios mirror what Ive been asking for more than a year," Rep. Mark Takano, D-Calif., said in an email, referencing hearings he requested last year and letters sent to four federal agencies including the Treasury Department. He asked them to look into the impact of investors' cash purchases and subsequent sales of mortgage-backed securities.
Invitation Homes at its peak was spending almost $100 million per week on homes across the country. That purchase rate had slowed down to $35 million in purchases per week, Invitation Homes CEO John Bartling told American Banker in a January interview.
"They played this thing well," said Mark Hughes, chief operating officer of First Team Real Estate, one of the largest brokers in Southern California, where home prices have risen 42% since 2012. "I would actually be happy to see investors begin to release some supply. That would lower prices, and that's probably healthy given how quickly prices have risen."
Larger firms have not indicated that they would move towards wholesale liquidations. Bankers close to the industry believe Blackstone will part ways by eventually letting Invitation Homes go public. But smaller firms are more likely, and have already begun, testing the market to cash out with direct liquidations, Hughes and Blomquist said.
"What kind of impact will these large investors have on our communities? Im worried that large sell-offs by investors will weaken our housing recovery in the very same communities, like mine, that were decimated by the subprime mortgage crisis," said Takano, who represents Riverside, the third-most overvalued metropolitan area in the country, according to Fitch Ratings.
He has argued that investors' cash offerings have shut out everyday home shoppers and led to higher home price appreciation than is healthy. At the same time, he is worried where current rental tenants will go if investors liquidate en masse.
The effect of rising home prices is complex. Stronger prices have benefited consumers by doubling home equity to almost $14 trillion since 2011. On the other hand, higher prices and other factors have challenged the rate of first-time homeownership. Investors' liquidations could help boost that rate, but their purchases, critics say, have hurt it.
The latest phase in the industry's maturity is consolidation. Ellington Management Group, for example, is exiting its rental business via a portfolio sale, rather than an initial public offering, which it explored in prior years. This type of exit for now guarantees that the homes will continue to be managed as rentals. The concern to critics is if companies choose to break apart their portfolios and leave the rental business altogether, stranding tenants and flooding whole neighborhoods with homes put up for sale.
Consumer groups are watching the consolidations very carefully. They are concerned about rising rents, and the availability of affordable housing.
"We do not want to see multiple changes of management without adequate communication to tenants," said Sarah Edelman, an analyst at the Center for American Progress. "It's important to not have rents raised and people pressured out of homes as managements turn over from firm to firm," she said.
Large rental firms maintain strict credit profiles on tenants in order to predict vacancies and payment streams to investors. As new properties shift between management, contracts for some tenants may not be renewed, and other tenants will face higher rents. David Singelyn, CEO of American Homes 4 Rent, the largest publicly traded landlord, estimates the firm has outright sold several hundred homes of tenants that did not fit its profile, he toldAmerican Bankerin January.
Growing rents and stagnant wage growth have slowed down the recovery process, according to Zillow Chief Economist Stan Humphries, who forecasts rent increases will outpace home price gains this year.
Yet investors have also helped the economy by balancing distressed inventory. Their purchases have accelerated the housing recovery by helping rebalance the stock of distressed homes and injecting equity into the system, according to Steve Abrahams, Deutsche Bank's top residential mortgage expert.
"Distressed properties had a major role in sinking home prices in the crisis, but ironically [they have a role] in recovery, too," Abrahams said on a conference call with clients in February. He projected that it may take another two to three years before the stock of distressed properties reaches equilibrium. "Equity from investors replaced the equity that homeowners lost in the crash," he said in a later email. "Without investor equity, we would have been stuck with whole neighborhoods full of empty houses and no one able to buy them. They have steadily cleared this excess inventory off the market."
Some analysts believe investors will be bulls in the market for a lot longer before cashing out, despite the belief that less supply and rising home prices would lead to a deep decline in investor purchases.
Deutsche Bank forecast home prices would increase this year by mid single digits, followed by lower, sub-5% growth the year after. Now, analysts within the bank say they are rethinking those figures. Home prices may still have room to go up over the next two years, depending on a number of factors, they said. Other economists who also projected modest growth are now reassessing their estimates, upward, as well.
One factor that could continue to drive up home values even higher is if investors remain a big presence in the market, and right now, U.S. real estate is one of only a few places where investors say they can put money to work. Amherst Holdings' Main Street Renewal, for example, plans to double in size by yearend, CEO Sean Dobson said in an interview. "We will double on every front," he said, citing a current portfolio of almost 7,000 homes, 250 employees and around $700 million in assets under management.
According to most recent data, investors in December and January increased their presence in home sales to a level not seen in 10 months. They took up 17% of all existing home sales, versus 12% last August, Bloomberg data shows. At the peak of their buying, in early 2012, their presence did not exceed 20%.