Multifamily Starts Suffer Biggest Monthly Plunge Since 2006: Is The REO-To-Rent "Recovery" Dead?

Tyler Durden's picture

It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.

So does the above plunge indicate that this most important, if very much artificial legs of the housing (non) recovery stool, was just broken? And if so, does this mean that the US consumer is indeed so tapped out that hedge funds can no longer arb the rent-to-own cap-to-mortage rate conversion? If so, this is very bad news for all those who have been, incorrectly, proclaiming a housing recovery.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
buzzsaw99's picture

po people can't pay the mort so they'll have to rent, or so the thinking goes. because they can afford to pay the rent but not the mort. let them eat section 8. bwa ah ah

LawsofPhysics's picture

It sounds like you are trying to say that wages matter.  Hogwash, the robber barrons are back, go long sharecropping (the new "section 8" plan).  End the Fed already.

King_of_simpletons's picture

Overall great news today with the initial claims and now this.

Berkshire downgrade is also superb news. Dow 36000.

ArkansasAngie's picture

Speaking as a little bitty landlord ... The big guys have bet strong on Bernanke and company creating inflation.  Their excel sheets in the sky depend on a steady increase in rent rates.  You still have to pay debt back even if it is "only" 4.5%

I, on the other hand, am making money now and will still make money when these yahoos default cause I don't own nobody any money.

When rent rates don't keep up with their forecasts of inflation banks and such will take another hit. 

Economic value based on income is a bitch and results in insolvency when the cash flow ain't there.  Liquidity?  Horse manure.

Gromit's picture

Thanks for posting this link which gives the true picture.

Apartment construction is booming.

It's been seven years now without much new supply so the market will be able to absorb it for a while before it puts pressure on rents.

MarsInScorpio's picture

Gromit:

 

Have you bothered to check out rental rates recently? 2 BR apartments going for nearly a thousand a month in third-tier markets. 3 BR apartments going for $1500/month in the same size markets. Four BR apartments don't exist in the new construction. And we are talking perhaps 850 - 1,000 square feet for the 2s, and 1,000 - 1,300 square feet for the 3s. These are not luxury manors.

 

I know you can point to some market somewhere (NYC, for example) where those rates would be heaven-sent; but please, let's keep this in the Big Picture nationally.

 

The fact is that rentals are approaching, or have surpassed, mortgage payments. The problem is that so many people who aren't in their own home can't get qualified, especially if the lender wants 20% down. You are talking $40,000 down on a $200,000 home.

 

That is where this building boom is going to stumble and fall. The rates are unaffordable - except for people getting housing allowances.

 

Here comes the over-hang - and with it, another bubble-bursting hang-over.

-30-

 

MachoMan's picture

You're right, but you're also going to eat a nice loss when valuations decline due to a decrease in the amount of rent that can be charged...  or interest rates rise...  take your pick.  I advocate putting a slice of the portfolio into medium range RRE (less than 3x avg. local salary)[there isn't a better return out there for morts], but it isn't a panacea.

Shizzmoney's picture

The country is in an income crisis...and you can agrue we haven't even hit its peak, despite it happening for 30+ years.

Over 100m are paid less than $40K.  So, they will go where the cheapest rents are.  They will have as many roommates as they can fit (state permitting, there are new laws being placed about having "non family roommate" as well as tenant quotas) to help pay for the rising cost of bills and rent (contrary to what you are "taught" to believe, iPads don't pay rent: cash does).

I cannot wait til these hedge fund assholes and the corporate shitheads and central bankers are going to be in a rude awakening, starting in 2015 and years after, when *my* generation (16-35) has a) no interest in investing and b) no money TO invest with (b/c the majority of us are indebted).

Enjoy that short term thinking, assholes.

LawsofPhysics's picture

careful, some academic prick like Krugman is going to point out that "income" can come from investment while wages come from actually producing something of real value.

Cursive's picture

@buzzsaw99

The initial downpayment is the problem for most po folk.  Last time I checked (2 years ago), a rent home in my neighborhood was let at $1500/mo.  My monthly cost (mortgage, taxes, general upkeep) is about 60% of that.  On top of that, the rent home wasn't updated since maybe the '80's.  Of course, my LTV is about 70%, so I had to "pay" for this priviledge.

CheapBastard's picture

Last year there was some movement of houses in my area...but they had to reduce them 20-30% to sell them. This year is dead despite it's the "peak season." Not even rentals moving much.

 

If this"peak season" is miserable, I wonder what the Fall will look like?

Dingleberry's picture

Housing faces several problems, none of which are correctable.

Baby boomers retiring en mass and trying to sell (seeing it in my neck of the woods, but only good houses in good hoods sell). usually under 200k. Everything else sits and sits and sits.

Student loan bondage stories are making a daily appearance in the news now. The millinials are fucked. They aren't even buying cars, let alone houses. Hope their iPhones give them some comfort.

Banks aren't lending. Sure, if you have great credit and can get an appraisal that jives with the asking price (good luck with that one).

And FHA is changing the rules this month. Permanent (i.e. lifetime) PMI (or whatever they call it), no matter the loan balance. Got that? 30 years of paying for loan insurance. So about 40% plus of the market is done thru them. Those lendees just took one in the anal cavity. Hard and with no lube.

So that leaves the conventionals and cash buyers, which are actually quite numerous according to my realtor friend.  

It looks like 3% mortages aren't enough to do the trick. Last we had rates like that (with ARMs) RE skyrocketed.  It's easy to see why that won't be happening again anytime soon.

buzzsaw99's picture

Mortgage insurance is a sweet, sweet, racket. Ask MGIC and Radian. You collect and collect and never have to pay out a claim no matter how bad it all goes to crap. Lifetime PMI sounds a lot like student loans, what a great scam!

W T F II's picture

Sounds promising...QEEE, after QEE is tried seems to be THE logical and effective solution

i-dog's picture

I'd like to know why JOYFUL is dead (ie. barred from ZH..."Access denied" to his profile). Tyler?

CrashisOptimistic's picture

Only data matters.  Why join a cult of personality?

dick cheneys ghost's picture

ZH is nothing without a good, diverse comment section................

Son of Loki's picture

They must of stopped accepting EBT cards as down payment for it to plunge so much .... with zero interest rates and Uber EZMoney out there an dtons iof incetnives such as free big screen Tv's, etc ...but only if you sign on the dotted line for 30 debt slavery.

Thisson's picture

Because he's a fucking moron who keeps posting racist crazy shit.

Cursive's picture

I've had two unsolicitied refi offers just this week:  one via mail and a phone call from my current mortgage holder.  Something is up.

GMadScientist's picture

Me too...and I don't even own a fucking home.

Cursive's picture

@GMadScientist

Really?  Well, there's NEVER been a better time to buy...  :)

GMadScientist's picture

I'm confident there will be an even better time to buy in fairly short order. ;)

MachoMan's picture

And this is why there is no traction on the recovery...

SunRise's picture

Let's see . . .they want you to refinance a non-existent asset, so you'll have more cash?  Is it the Federal Reserve that's sending these letters to you?

EscapeKey's picture

Startling, how short peoples memories are.

Reminds me of a few years back, with oil prices marching towards $147, people stopped buying SUVs altogether. 6 months later, with prices receding, consumers started purchasing them again.

Goldfish me... er, what was I talking about again? Oh, the Apprentice is on.

fuu's picture

Speaking of gas, up $0.60/gallon in 3 days here in Minneapolis. From $3.59 on Monday to $4.19 yesterday.

Agent P's picture

Maybe the rent isn't too damn high

Seasmoke's picture

No just the fucking property taxes.

Sudden Debt's picture

no....

MULTI FAMILY BUILDINGS as in PRISONS as in RENT FREE!!

fuu's picture

He and TwoShortPlanks got the boot.

tip e. canoe's picture

now that's a damn shame

i-dog's picture

"First, they came for the communists...and I said nothing. Then they came for........"

xcehn's picture

ZH can't exist on an island. Long arm of the kleptocracy. It's either bend or break.

HulkHogan's picture

How do you guys know this stuff?

fuu's picture

Click on their profile link. For an active user you are taken to their profile page, otherwise you get an Access Denied page.

fonzannoon's picture

Wow. Twoshortplanks......what a bummer.

i-dog's picture

Indeed. On a short, er, long enough timeline, the survival rate for [painful] truth is reaching 0 ... or something like that....

Rory_Breaker's picture

Damn! If he is reading this I'd like to thank him for that Custodial Framework post.

Thisson's picture

Awww, some bigots got banned - let's all cry over it.  Boo hoo!

dolph9's picture

Silly hedge funds, not everybody's on section 8.

No have money, no pay rent.