It was a rare lucrative business for Wall Street in the aftermath of the financial crisis: snapping up properties in foreclosure and renting them out. So good, in fact, that now, as the distressed pool dries up, some investors are refusing to let the rental-model fizzle. They’re building more and more of the houses themselves.
When Wall St. gets involved….things tend to get screwed up! As Real Estate Investors……We need to truly understand why this will be good for us!
Excerpts from Las Vegas Review-Journal….see the whole article here.
American Homes 4 Rent, a five-year-old real estate investment trust and the biggest of the publicly traded landlords by number of homes, is buying lots and houses around the U.S. Colony Starwood Homes plans to purchase at least 600 just-erected properties over the next year from more than a dozen builders.
These type of actions by large Wall St. investors will certainly drive the prices of all existing homes higher. Wall Street investors often expect a rate of return that is unreasonable. Lets dial the clock back to 2005 or so. Ok….the real estate market at that time was getting ready to sky rocket because of the fact that the banks were issuing adjustable mortgages to almost anyone. The banks were rolling up these so called subprime mortgages with solid mortgages. Long story short…..we all know what happened when those adjustable mortgages were scheduled to reset and the people who were responsible for them couldn’t pay their mortgages………CRASH!
Large Wall St. investors:
American Homes 4 Rent (AMH)
Colony Starwood Homes (SFR)
These Wall Street firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another, American Homes 4 Rent, which went public in 2014 as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.
And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda.
The Smart Money on Wall Street – Private Equity Firms – Had a Goal
And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:
“A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up.”
Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.
The problem with this strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing.
Large Investors Are Doubling Down On Rental Properties In The USA
When these private equity firms move their assets into the public market via IPO’s (Initial Public Offering) they essentially allow the public to control their market price. So when the market gets disappointed by a company’s quarterly results….its stock price more than likely tanks. We truly believe that houses are best controlled by a local presence and not some by Wall St. companies. When the market loses its belief in these investment instruments, we believe that these companies will unload their assets…..so be on the watch out. Studies have shown that residential real estate is best controlled by a local presence and not by Wall St. companies. Investors should prepare themselves by looking for the best discounted investment properties.