The Smart Money Quietly Abandons The Housing Market

Wolf Richter's picture

Wolf Richter

In real estate, national averages paper over the gritty details on the ground and are a crummy, often contradictory indicator as to what is happening in specific metro areas. When a new trend starts or when a reversal takes place in some locations, it’s watered down by data from other unaffected locations to form the overall averages. But even with this caveat, a national average suddenly sounded an alarm for the housing market: the smart money has started to bail out.

The smart money entered the housing market gingerly in 2011 then piled in helter-skelter over the next two years, gobbling up vacant single-family homes out of foreclosure. The forays were funded by Wall Street, awash in the Fed’s crazy-money. The smart-money operators trained their guns on specific markets, such as Phoenix and Las Vegas, and bought homes by the thousands that they tried to rent out. Then they spread their campaigns to other cities.

The tally has reached 200,000 single-family vacant homes for which they’re now trying to find tenants. In the process, mega-landlords have emerged. On top of the heap: Invitation Homes, a unit of private-equity giant Blackstone Group, and American Homes 4 Rent, a highly leveraged REIT that went public last August.

As in the heyday before the financial crisis, their smartest minds are now feverishly at work trying to figure out how to shuffle risks and future losses off to yield-desperate investors who’ve been driven to near-insanity by the Fed’s relentless repression of interest rates. So Blackstone and American Homes 4 Rent have started selling synthetic structured securities that are backed, not by mortgages, like the toxic waste before the financial crisis, but by something even classier, rental payments – based on the rickety hope that these single-family homes will stay rented out. Wall Street is already jubilating: the market for this type of synthetic monster is estimated to be $1.5 trillion [read.... The Exquisitely Reengineered Frankenstein Housing Monster].

But now the party appears to be running out of booze. This frantic institutional buying has driven up home prices – in some areas above the levels of the prior bubble. Trying to make money by buying these homes at inflated prices and renting them out into a tough job market where strung-out consumers with declining real wages have trouble making ends meet has become a precarious business model.

In some of the formerly hottest metro areas, purchases by large institutional investors – those having bought at least 10 properties over the past 12 months – plunged in January from a year ago, according to RealtyTrac’s Residential & Foreclosure Sales Report: in Jacksonville, Florida, by 21%; in Tampa, by 48%; in Tucson, 59%; Memphis, 64%; in Cape Coral-Fort Myers, Florida, by 70%!

Institutional purchases hit the skids in over three-quarters of the 101 metro areas that RealtyTrac analyzed, their share dropping to 5.2% overall, from 7.9% in December, and from 8.2% in January 2013. It was the lowest monthly share since March 2012, at the infancy of this whole bonanza.

But 23 of the 101 metro areas had year-over-year gains, some of them late starters. In Atlanta, institutional purchases rose 9% to where a quarter of all homes were purchased by institutional investors. That’s how the Fed has “fixed” the housing market. In Austin, the institutional share soared by a mind-boggling 162% to reach nearly a fifth of all purchases. In Denver, their share rose 21%, in Dallas 30%.

And in Cincinnati 83%. “Big hedge fund investors,” explained Michael Mahon, Executive Vice President at HER Realtors, which covers the area. “I think that’s contributing to the lower levels of inventory available on the market,” he added, seeing how these vacant homes have been pushed from the much scrutinized for-sale listings to the ignored for-rent listings.

“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said RealtyTrac VP Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”

So forget the by now ubiquitous all-encompassing polar-vortex explanation. Which begs the question: if not institutional investors, who the heck is going to buy these homes at these prices?

Existing homeowners who buy a home and sell their old home don’t count. They’re just swapping homes, not creating demand. But foreigners are buying in certain cities – Chinese and Argentine buyers and others who want to deposit their wealth while they still can in a reasonably safe place. So they’re creating demand.

But the most powerful economic force in the housing market, first-time buyers? Normally, they’d swarm all over these homes and create real and lasting demand and make the housing market grow. But prices have soared, and mortgage rates have crept up, and young people are teetering under piles of student loans, and so that economic force has collapsed to record low levels. Read.... Without Them, The Housing ‘Recovery’ Remains A Sham

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ZeroPoint's picture

That explains why I am seeing BlackRock ads aimed at retail investors now.

Ecclesia Militans's picture

We purchased in Northern VA in February of 2012, at close to the very bottom of the market.  I have the largest house in a small (unfinished) development, paid way less than the closing price of any of the other homeowners in their houses, and while our property value appears to be holding steady, none of our neighbors will even acknowledge us after two years because of what our home purchase did to the value of comps in our area.

Papasmurf's picture

Northern Virginia is an exception to the rule due to it's close access to the K-street gang and the den of thieves at the intersection of Pennsylvania Avenue and First Street.

boeing747's picture

In my personal experience, RE bubble 2.0 started 2nd half of 2011.

AdvancingTime's picture

I have owned an apartment complex for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway.

Today not only have many people shed the extra home many have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. The article below delves into how super low interest rates are hurting housing.

no more banksters's picture

The blackmail of the German economic oligarchy

... and another indication of where things are going in Europe and Germany

mumbo_jumbo's picture

"forced to proceed in huge cuts in wages and dissolve labor rights"


we've done this in the USA, it's not working very well.

screw face's picture

the west coast is toast on a on it

Hongcha's picture

Securitizing rents = fucking garbage.  So what's next Blackstone, securitizing security deposits?

The RRE equivalent of penny slot machines.

Watch SEA and SF RRE; when those areas start to roll over, decidedly, it's over.  Because that will mean the Chinese money is slowing and that my friends means the end of the Obamanaut charade known as "The Recovery".  We will start the next flight down in our long steady descent to the new dark age more or less at that juncture.

ebworthen's picture

Yet another pump and dump by the Financial vampires on Wall Street.

Almost six years out from the last crash and they are at it again.

FED and CONgress stepped in and gave them more blood of the populace.

0% on savings forcing most to chase yield in the equities casino or hope against hope that the rising home value would allow them to sell or take out a home equity loan or reverse mortgage to support the kids who can't find decent work.

Yes, the blood sucking parasites have not been hunted or killed with a wooden stake. 

The mirrors have all been broken or removed so you can't see they have no reflection, garlic outlawed, and crosees banned.

BeetleBailey's picture

...and yet you hear, from every every swinging real estate cock and set of tits...

"The market is great".....

...and you see the high as fuck rent rates they ask....

Insanity............which willl not end matter what rosy-faced fucktards say or think....

I Write Code's picture

Traditional home rental produces only operating losses at the purchase price.  Let's assume this is true even when homes are picked up cheap out of foreclosure - only cheap rental prices will work for them.  The profit comes from holding until the market improves and then unloading.  Can you hold them and raise the rents to back derivatives and skim cash?  I dunno.  I would not think so, the single-family rental market has never been that large or strong, it would take a basic change in the market.

Of course having bought them with ZIRP money helps, but that's borrowing short to finance long, which in the real world bites ya hard after a while.

-.-'s picture

"In Austin, the institutional share soared by a mind-boggling 162% to reach nearly a fifth of all purchases..."


I fucking knew it! Now, to figure out (or wait until debt rolls over and buildings go bust) which forgeign bank(s) own the multi-million dollar condo/apartment unit ALL OVER THE DOWNTOWN ZIPCODE...


I should just post pictures of what I am talking about in Austin, Texas---it is awesome to watch this inflated city just keep filling up!



"I take a shot of Hennessey, now I'm strong enough to face the Madness/Nickel-bag full of sess weed laced with Hash..." -2Pac- RealWreckognizeReal

Jadr's picture

It is really market dependant and making such a wide brush comment is foolish.  In many markets there are vast cost differences in renting or owning a house (i.e it is cheaper to own then to rent).  While these periods don't last forever, i.e the real reason institutional investment is slowing down is not because they don't want to own RE but rather that there has been huge cap rate compression over the past year.  Most companies won't accept properties with net yields below 4%, which is in my opinion even cutting much too low.  Last year in Atlanta you could buy relatively new properties with net cap rates in the 8% to 10% range in the not so great but ok areas and 5-6% for properties in nice areas.  The price appreciation experienced in these markets have made it so that it is much harder to find quality product that generates good yield.  Plus, most market players knew that last year was going to be the last really large gain.  Prices will probably appreciate a bit in most markets this year but by next year it will likely taper off significantly.

Without the expected upside in addition to the rental yields, the returns on properties are not that attractive for the big guys.


kurt's picture

Wait until they see their taxes on these properties, when they are empty of tenants, in the winter, when the roof needs a repair, when the contractor has gone hunting, and rain is on the way, and the kids are tagging grafitti, and a bum took a shit in the back closet, and the local yokel property manager is in Florida, and the city has ticketed because of failure to remove snow.

Jadr's picture

Which is why Clark County aka Vegas is such a great place to invest in residential real estate (well, more like was since at this point its very difficult to find quality product at cap rates that could support leverage from market sources unless you are one of the huge funds with miniscule cost of capital).  If you are leasing out starter home/mid tier homes you will be leasing your properties below their "fair rent" threshhold and your property tax increases are capped at 3% a year.

Papasmurf's picture

a bum took a shit in the back closet

A friend had that happen when his home was under construction.  One of the workers crapped in a drywall bucket and left it in his foyer.

AdvancingTime's picture

Prices must rise and real estate appreciate more then the natural depreciation from the wear and tear from age or the main driver for owning it vanishes. As a contractor I can state that every property has problems , each different, and each hard to diagnose before determining  how to fix. having someone manage single family units for you never works.

Mr. I-N-The Sky's picture

Don't forget lawyer fees when deadbeat tenants abuse the system to tie them up in court rent free for months.

How do they factor that into their quarterly projections?

Jadr's picture

For disclosure sake, I work for a very small player in the institutional RE game but the answer to this should be obvious.  Every model worth a grain of salt accounts for an amount of vacancy loss, credit loss as well as all the other myriad cost factors in owning a property.  The part that I find absolutely shocking about the Blackstone Securitization is how retardedly low of an interest rate they managed to get investors to accept for the paper.  I recall reading that the highest rated tranche was 1.8% and the lowest rated tranche was like 3.8%.  Seeing as though for mid level/starter homes which most investment groups have flocked to (other than the super large players which can get funding so cheaply that cap rates are almost meaningless) have net yields of 5% to 10% (obviously very market and sub market dependent) Blackstone is getting ridiculously low funding costs without putting their true collaterall at risk and making a spread as well.  The underlying homes are probably leveraged at ridiculously low rates which companies like Blackstone can get which in essence this securitization is allowing them leverage these properties twice at low interest rates.


Blackstone got in very early so they acquired many properties with very strong cap rates (although from what I have seen they have also massively over paid for some homes, but knew that it didn't matter because their funding costs and other factors of scale made overpaying less important than deploying the capital).  Say in the Atlanta area in B and C type areas they are getting Net returns of 7% to 10%, I don't have knowledge of their cost of capital but I would assume it's something stupid low, like probably sub 2-3% which they leverage the homes up to at least 60% and potentially up to 80% ltv.  They then get this second round of funding backed only by the cashflows from the properties at super low rates of 1.8% to 3.8%.  They obviously use the leverage to acquire more properties providing more cash flow.  And they repeat the game and increase cashflows further. 


Here's an example laid out of how ridiculously profitable this can be for Blackstone.  So they start with a house lets pretend its $100,000 with a net annual return of 10%.  They get $60,000 at lets say 3% which is a high interest rate low LTV example.  They then do this securitization and say they get 40% of the homes value paying 3.8% (I didn't do the math on what the value of the underlying homes was vs the capital raised so this number could be off).  They have acquired a home for $100,000 providing them $10,000 in profit per year which they must pay 6800 of for debt service (assuming absolute maximum interest rates they could be paying) and have another $100,000 to invest.  Let's say that because of the time involved in the leveraging etc, cap rates have compressed, their $100,000 used to buy a new house only returns $9000 in net profit.  Well they used $100,000 in capital and now have $200,000 worth of collateral and have a net income of $12,200 off the original.  Assuming RE prices stay flat or increase they do amazing, and the cap rate itself can be great given the currently repressed interest rate levels.  The thing is though, they repeat the leveraging process with each new home acquired so they are getting more and more assets and gaining more of a spread on their debt service expenses and cash flow from the properties.


My company wishes it could get  financing using our properties as collateral that blackstone is getting merely securitizing their income.  Its crazy.

StychoKiller's picture

We're spending around $5000/yr on maintenance (mostly replacing windows).

BullyBearish's picture

House of Cards...again