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When big money chases rentals
Another interesting trend courtesy of the low interest rate environment created by the Federal Reserve is the feverish chase for yield. In a previous article we discussed that a large part of the higher rental prices were coming from a segment that had lost their homes via foreclosure. Since the housing bubble popped millions of Americans have lost their homes. As the report also found, many of those stayed within the same area but likely shifted to a single-family rental or an apartment. What we did not discuss however is how investors are playing a role in pushing up rental yields as well. As bigger blocks of large investors purchase distressed properties, many add value to the property and try to push rental prices upwards. I saw a presentation a few months ago of some local investors in Southern California purchasing older apartment buildings (some built in the 1970s) and upgrading them to more modern standards. Once the upgrades were complete, these investors pushed rents up by 7 to 10 percent. What impact is the flood of investors having on the market?
Shift from owning to renting
The drop in home ownership has largely come from the removal of two factors:
-1. The easy access toxic loans that provided leverage to anyone with a pulse
-2. The millions that have lost their home via foreclosure
Even with super low down payment loans like FHA insured products, many Americans simply cannot afford to purchase a home even in today’s low rate environment. Yet this low rate environment has had a big impact on rentals:
“BNP Paribas: - As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion.”
This is major shift. 30 percent of recent single-family home sales went to cash buyers. Private equity is now having a big impact on this market. The chase for yield is largely driving these investors and rental yields are favorable in many markets. Many investors have looked at markets that have been forgotten and jump in, buy up places in blocks, and try to push rents up because of the perceived added value of their upgrades. It is an interesting process but once again the Federal Reserve is largely pushing big money into a market that is impacting most Americans. At a time when incomes are stagnant higher rents stretch budgets even further.
Monthly payment versus price
The massive drop in mortgage rates is largely a method to keep home values inflated. Do not doubt this for one second. Even the Fed came out directly stating that QE3 was largely going to be a MBS program. You do not get more specific than that. They have an open commitment that is likely to buy nearly half a trillion in MBS within a 12 month period.
The impact is enormous here. For example, let us run a $500,000 mortgage from 2000 at 8 percent and one today at 3.5 percent:
Principal and interest @ 8%: $3,668
Principal and interest @ 3.5% $2,245
To get the monthly PI similar to what it is today with an 8 percent mortgage would require that $500,000 mortgage to be at $300,000. Even with a low rate people will be paying this much over the life of the loan only with principal and interest:
$500,000 mortgage PI @ 3.5% over 30 years: $808,000
Add in taxes, insurance, and maintenance and you are inching closer to $1 million for a $500,000 mortgage. The focus on the monthly payment is really driving a large part of the housing market today. That is why FHA insured loans have come in to plug the low down payment market left by the toxic mortgage debacle.
Thanks to these low rates, big investors are likely also bidding home prices up competing with families simply looking to buy a home. More unintended consequences. It is a fascinating trend seeing so many investors actually jumping into the rental game. Big money however is fickle and as quickly as the trend ends, it will quickly evaporate.
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All these idiot PE firms are piling in because they have cash to burn and second it backed up by the Government, they cannot lose. It doesn't matter if the broke asses that couldn't afford a mortgage now cannot afford rent- the losses are socialized.
And its easy, make 1 call to lawyer, get a cayman SPV, go to auction.com buy a 10 pack of homes, make 1 call get a property mgt company to rent em', book the profit forward bitchez, then tranche CLO within the SPV and underwrite a 100m+ MBS and get GS to underwrite em= profit.
added points if you are on the other side of the CLO insurance, and make the "lower risk" CLO tranches fail on purpose.
Capsocializm bitchez.
Exactly right. Rent-backed securities cubed, hitting a global derivatives market near you! Get 'em while they're hot and don't forget to short the shit out of them in a couple of years.
Ain't financial innovation grand? Back in my day we used to call it "fraud" but, ya know, times change.
Jesse Cafe Americain linked to an article in the Tampa newspaper reporting that Blackrock was purchasing a billion dollar block of 15,000 homes in Tampa.
And that is why I refuse to be a landlord without a NOI of 10% or greater. It simply is not worth the risk of having it trashed and all of the costs involved in maintaining the property. NOIs where I live have come down to around 5 or 6% from nose bleed levels of 3 or 4% during the bubble. Still way too pricey for me.
the City of Bell CA is 87% Latino renters-(mostly alien), most collecting state subsidies for everything (food, rent, healthcare, daycare, eldercare), when those subsidies are cut those landlords will lose everything yet still retain the debt.
There's no surprise that the landlords are looking for ways of making money; they've done it and will continue to take what they can until there will be another law, a firmer one. The aliens usually have no insurance and/or great means of taking care of themselves.
then CA will give subsidy to landlords
Housing doc does a great job, but a few simple parameters need to be stressed.
1 In most of the country, carrying costs (utilities, taxes, insurance, maintenance, etc.) are at or above $1,000/month. The kids camping out in Mom's basement can't afford that. If a house is free, the math still doesn't work, and taxes/utilities are climbing.
2 Renting single family homes is a fool's errand. Renters are the exact opposite of owners. The property will be trashed.
3 SHADOW INVENTORY trumps all discussion, lies, diversions about this market. In the three states where the extended family owns property, empty houses are a plague.
"2 Renting single family homes is a fool's errand. Renters are the exact opposite of owners. The property will be trashed."
Exactly! I had a friend who rented out his condo. Every lease ended with several months of rent non-payment. Each time it cost him time and money to get them out. He got judgements for the back rent and even had their wages garnished. These were ultimately non-collectable debts. Renters just changed jobs, so part of his task was to be a skip tracer so he could go to court again to garnish wages again.
Every lease ended up with his place trashed. He had to repaint every time. He had to replace durable fixtures, cabinets, stoves, counters etc that were only one or two years old. Every time, he had to replace carpet that was only one or two years old. We concluded that carpeting was just a diaper for a condo. The last tenant wrecked the new vanity and counter he had newly installed in the bathroom prior to them moving in.
Every referral he got for potential renters was glowing. The reason for satisfactory recommendations was their current landlord wanted these folks out. After the most recent rehab of his condo and attempt to lease it again, the county came in and advised him they had a section 8 tenant for him. He had to take the rental off the market or face discrimination charges. Ultimately, he found it cheaper to leave his property empty (the only way to avoid section 8) until the market picked up so he could sell.
Calling the curent landlord for a reference is a rookie error. Check second & third back in the history.
Papa, you raise a good point; the quality of renters has changed dramatcially. I owned part interest in an apartment complex in Fort Worth in the 1970s...it was near a college campus. A 'bad' renter was a student who left he place dirty...that was considered "trashing the place" back in the 1970s.
Now, my landlord friends tell me of $15,000 damages and up of renters who kick in the walls, crack the tile floors, etc. As you mention, it is almost impossible to collect from these renters.
Papa and Arnold, I wonder why this change has occurred. I don't know but I can't help but think that this is because in the US renters are, in general, lower on the socioeconomic ladder. And as we watch disparities of wealth and income increase we feel more and more screwed over by anyone higher up the ladder, including our landlords.
At this point our animosity and contempt is such that we have a couple drinks and it feels good to kick in the rich guys headlights and apartment walls.
I'm not excusing the behaviour, merely trying to understand it.
It may be yet another symptom of economic injustice.
D
home "owner"......bought $500k house with $450k mortgage and now underwater at $300k
home "renter".....lived in a nice place, don't maintain it, abuse it and trash it, move on to the next house.
property value has been going up due to cuts in long term interest rates.... it is artificial.....
well we are at 2.3%...so not much more subsidy left for home owners.....and natural growth in assets is much difficult with unemployed population.
unless we get negative interest rates whih will then lead to war with china, homes are not going up in real terms. just your wage is lagging behind dollar erosion.
When the free shit army is defunded rental rates will crater.
As a former landlord I can say good luck to those small investors who try to make a profit. Two months with no tenant and you are in the hole for a year.
Tenant damage of even a few thousand can ruin any profit for years.
And if you get a tenant who destroys the place plus needs to be evicted you are hit with a massive, permanent loss.
Add all this to sinking house prices depsite zero interest rates and being a landlord is a bad idea.
On the other hand, my GLD and SLV have gone up over 200% with almost no work or stress.
I've looked at buying some rentals but the property taxes are killers. I've got a $185K condo and the property taxes are $4500 year. Nearly $400.00 a month. Add that to a mortgage and upkeep and it's hard to get rent under $1200 and still make a profit. Fucking taxes will keep going up
Yep. I thought about buying a house in cash last year, but the property taxes were killer. And, as the federal and state govts gets more desperate/pathetic, they will hike them more (especially if there is a boom in rental prices). I actually would worry about private property confiscation, too. Maybe not this year or next, but somewhere down the line. It is clear we're headed toward a new form of govt.
Our housing system is badly micromanaged from DC. Fed pumps billions into housing and agency MBS and the only thing that has happened is that manufacturing is dying.
Great job Bernanke and Obama!!!1
http://confoundedinterest.wordpress.com/2012/09/28/this-is-a-recovery-manufacturing-shrinks-to-lowest-level-since-oct-2009/
Get rich via housing, part 2!
Should be better than the prequel when renters can no longer pay.
House across the road from me rents for $3500 a month devided buy 10 people living there with 10 cars a very affordable $350 per month
Ropes and lamp posts......
From your previous article that you linked to,
"Rents are being pushed up because of those who have been foreclosed shifting to rental units (more rental demand) ..."
Homeowners becoming renters by itself shouldn't have much net effect on supply and demand. If a homeowner sells or loses his home to an investor and becomes a renter, then there is one more renter, but also one more home for rent. If the home gets sold to a renter then there's no net change to renters as the person selling or losing his home is offset by the former renter becoming a homeowner. Similar logic applies when a homeowner sells to an existing homeowner.
When second or vacation homes are involved, then net rental demand could change. For example, if one sells their second home to an investor, then there's one more home for rent and the same number of renters. That would cause rents to drop all other things being equal. If a homeowner purchases a second home then it would have an opposite effect.
Vacancies after the time a home is repossessed by a bank, but before it's sold, would cause rental demand to increase with no increase in immediate supply, thus increasing rents somewhat.
Correct in the long run, not correct in the short. Owners are being evicted but the homes are not immediately rented. Instead, we have over 2 millions homes nationwide that are empty and not being actively marketed. As others have said, we also have many former owners doubling up with family or renting spare rooms. Indeed, I predict that the largest drag on future household formation and, therefore, future new home sales, will be the shadow inventory of extra bedrooms to be rented by boomers needing income to replace lost interest income and diminishing retirement accounts/pensions/social security payments.
We agree, see my last sentence. Good point about the boomers renting extra rooms.
In the South Cal coastal town I live in there are 10 REO's not for sale (zero for sale afaik), and 111 places for rent in the MLS (probably a lot not in the MLS also). Assuming a 5% rental vacancy rate that means 2200 rentals, so vacant REOs are less than 0.5% of the total rental pool. I'm sure it's a more significant percentage in less affluent neighboorhoods, would like to see some stats.
what the author left out of the rental picture is the fact that the upgraded rental units are not being rented. there is a glut of 'new' units in most cites. there are lots of 3 bedroom units for $3500 a month but very few cheap 1 bedroom units. shit, 1 bedrooms can go for $2000.
...and you cant force people to pay more rent. they just co-habitate. 4 families in one unit. most of the nice but pricey units i see ar vacant. most i bet have never had a tenant.
Serious question.... the Fed is buying MBS from FNMA,FHLMC and Ginnie Mae. I understand that the MBS have been grouped into pools of many loans that FNMA,FHLMC and Ginnie Mae are monitoring for the primary investors and paying the interest to those same investors. My questions is what changes when the Fed buys these MBS from FNMA,FHLMC and Ginnie Mae?
I wonder what hedge funds/banks/pension funds bought MBS paper at a huge discouint and is now trying to sell it back to the FED at par?
Good question. Since it's all taxpayer money, the substance changes very little, but there are at least two changes of "form."
1 With a reduction in loans on the books (if that still means anything) Fan, Fred, etc. have more "room" to make new loans.
2 It's easier for the FED to hide losses in it's massive balance sheet, and yes there will be massive losses.
It's never a good thing when your CFO's keep committing suicide.
" The Fed is where bad mortgage paper goes to die".....great line stolen from some genius.
I get a good return on rental properties, definitely better than 0.05% interest on fiat deposits, but collecting from tenants is not getting any easier.
What I do is offer a 10% discount if they will "direct deposit" the monthly rent into my checking account from theirs .....it might cost you a few bucks but well worth it
so a half M home with an 8% mortgage is really worth about 300k? that pretty much sums up the asset collapse. (ZIRP is a deflationary pollicy, not a corrective measure) as long as the current admin subsidizes rents landlords will continue to raise the premium. i feel pretty sure most food inflation is due to foodstamps, and that i pay more for healthcare because of the healthcare plan.
i am surprised that those 70's era apartments can be retrofitted. (just like you can't put a couple pounds of welding rod into the frame of totalled auto and reprice it at bluebook retail - the state of CA will put a salvage sticker on the title - which is what they should do with those apartments)
ironically if you raised interest rates the value of the home would decrease, (encouraging cash buyers to step into the market) assuming all other economic factors remain equal. but the Ben B policy is to punish savers and replace collateral with government fiat currency. this is why Romney wants to get rid of the guy. Ben B is a socialist of the highest order. someday we'll all be living in those micro apartments they want to build in SF (300sq ft) and everyday we'll step outside and wait for the helicopter to drop money. sigh
I least you are "pretty sure". I will admit that foodstamps would drive up food prices, but by how much? Compared to drought and inflation? As for healthcare, I am "pretty" sure you don't pay for it at all. What you pay for is INSURANCE. Very few people actually pay for healthcare directly. But your point is correct, Obamacare may drive up health INSURANCE in the short term as people are legally required to buy it soon, and it takes 10 years to produce more doctors.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Good call Mr. Jefferson !
Why do people keep posting this shit as if it's a real quote...
http://www.snopes.com/quotes/jefferson/banks.asp
http://www.monticello.org/site/jefferson/private-banks-quotation
http://www.dailypaul.com/80247/can-we-please-stop-propagating-the-fake-j...
And my 2 favs:
"The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government."
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants."
-- Thomas Jefferson
Let's Roll
If I have the right to arm myself against a tyrannical government, then I must also have the right to have the same kind of arms the tyrant has, or the right is meaningless.
Where's my drone?
Did the Government come and take yours away?
how many are paying rent to a landlord not paying the mortgage........what a mess !
I know of this happening firsthand. Mother just found out yesterday from the bank that she had one month to vacate her rental because landlord was being foreclosed upon. Landlord lives in France; there is no legal recourse.
So the bank will foreclose the property, kick out the paying tenants, and then the property will sit vacant, a benefit to no one except the copper thieves. What would be the difference if the bank were to keep the tenants and instead turn the property over to a rental management company until it could be resold? Those ignorant bastards and the companies they run deserve to crash, and the imbeciles who formulated the world we live in deserve nooses around their necks. Preferrably ones that strangle slowly instead of snapping the neck quickly...
It takes longer to sell and a lower price if the home is occupied, especially by renters. Banks do not want to be property managers, they make their money being banks.
I know of about 5 people that that happend to...But that was right after the crash..
I know of multiple instances of exactly this...one owner hasn't made a payment in nearly three years, went in nothing down as owner occupied, and collecting $2k mo for three years...fubar.
It is a fascinating trend seeing so many investors actually jumping into the rental game.
Watching so many investors jump into the house flipping game was fun too, until...
Why? Because they're not Big Money that's why. As with gold OWNERSHIP rules...and "levering up rentals" says to me "all you got is a pile of debt in need of an income." EQUITIES have that. "Slightly less overhead" from what I'm told as well.
The rent is too damn high !
The shift from Ownership to Rental is due to changing employment. The days of working for a single employer your entire life are gone. People must be free to move from Job to Job. Today you may be working on the West Coast and next week you could be working on the East Coast. Home ownership has become impossible for the majority of people because everyone of working age must be mobile.
We all wish... the shift from ownership to rental is because people don't have jobs... or, alternatively, don't have jobs that can repay the old debt/valuations... not because they're simply trying to be mobile.
I think that also, the stagnant incomes are starting to hit people on the head and realize, they can't take on these mortgages and just assumes that things will get better, or that they'll eventually getting a big pay day.
Then reality hit.
Plus, vacancy rates are up in cities with employment, like Boston. This results in rising rents. This eats into future savings and income.
Our rental market went full retard around 07-08. Before that point you could pick up a 2/1 in a nice older nieghborhood for around $30k. Now those same houses are $60k+. I've got one I put maybe 5k into that I purchased for low $20's. Last appraisal put it at $56k. I wouldn't pay a hair over $40k for it.
There is a lake I would like to buy a rental on. If wages stay the same and rates creep back up to 6% those houses are going to drop like a rock, and that will happen everywhere. People that buy homes basically payment shop. My wife sees it everyday they know they can afford a house at x amount per month. Rates are really low but that lake I mentioned earlier has had almost zero activity all year. Condo sales are at record lows, but I haven't seen even a 10% budge in prices. Some homes are actually pulled off of market and listed for higher prices a couple months later. Why? I do not know.