Meanwhile, Big Investors Quietly Slip Out The Back Door On Housing As "Stupid Money" Jumps In

Tyler Durden's picture

Last September, one of the original institutional investors in the housing-to-rent strategy, multi-billion hedge fund Och-Ziff called it quits on the landlord business. The reason: "the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." As a reminder, the REO-to-Rental subsidized investment program, which led to an epic surge in demand for multi-family housing, i.e., rental, units was, together with offshore investors parking their cash in the US for safekeeping (taking advantage of the NAR's anti-money laundering check exemptions)  and the big banks Foreclosure Stuffing, the key reason for the recent, stimulus-fueled and quite transitory bounce in house prices in assorted markets.

Still, OZ's exit of the business did not spook too many of the other remaining investors who simply had no better investment options, and in a world of POMO and FOMO, they saw no choice but to become ever bigger landlords.

Today, another one of the original "big boys" has called it curtains: "We just don’t see the returns there that are adequate to incentivize us to continue to invest", according to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree) and BTFHousingD.

Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible."

Of course, one can say exactly the same thing about virtually every other market where those gambling with "other people's money" have no choice but to ride the tide and dance as long as the music emanating from the Fed is playing. However, it is rare to see one (technically, another) voluntarily step out even as others are still locked into a market where the returns are no longer worth the effort.

One such gambler is Blackstone:

Blackstone Group LP (BX), the largest investor in single-family rentals, has spent $4.5 billion to amass more than 26,000 homes and continues to buy, according to Eric Elder, a spokesman for Invitation Homes, the rental housing division of the world’s largest private equity firm.


Blackstone’s net yields on its occupied houses are about 6 percent to 6.5 percent, Jonathan Gray, the firm’s global head of real estate, said during a May 3 conference call with investors. That’s before using leverage from a $2.1 billion line of credit the private-equity giant arranged in March from a lending syndicate headed by Deutsche Bank AG.


While about 85 percent of Blackstone’s renovated homes were leased, Gray said, “we’ve got an awful lot of homes to continue renovating.”

Blackstone can have its homes: it's a different question if it will have the rental cash flow also needs to make these investments a reasonable investment. According to Carrington at least, the answer is a resounding no. And if people think the bottom will fall out of the market when the Fed pulls the curtain, just wait to see what happens to housing when the day comes that Blackstone announces it is shifting from the net buyer to net seller.

Back to Carrington's rationale:

Carrington, which started in 2003 as a mortgage investment fund and has managed almost 25,000 rental homes for itself and others, has been joined by hundreds of institutional and international investors buying single-family homes after prices plunged following the housing crash. The firms are building a new institutional real estate asset class from the 14 million leased single-family residences that are worth an estimated $2.8 trillion, according to Goldman Sachs Group Inc.

Even as demand for rentals rises amid a falling homeownership rate, yields are declining and companies formed to buy the homes that have gone public haven’t yet been profitable.


Funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Rose. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.

Others' experience justifies the logic:

Colony American Homes Inc., a division of Thomas Barrack Jr.’s Colony Capital LLC, has found tenants for only 51 percent of the 9,931 homes it bought for $1.4 billion, according to a filing yesterday with the U.S. Securities and Exchange Commission.


American Residential Properties Inc. (ARPI), a Scottsdale, Arizona-based real estate investment trust, and Silver Bay Realty Trust Inc., a New York-based single-family REIT, both reported losses in the quarter ending March 31. Owen Blicksilver, a spokesman for Colony Capital, declined to comment. Silver Bay CEO David Miller was unavailable to comment, according to Tricia Ross, a spokeswoman at Financial Profiles Inc. American Residential CEO Steve Schmitz and President Laurie Hawkes didn’t reply to e-mails seeking comment.

If nothing else, everyone now knows where the incremental "bubble" demand for housing has come from: not from the distressed end user of thes properties, for whom as we showed yesterday, the disconnect between real income and new home sales has never been wider: it was all large institutions who invested OPM, and chased any upward moving price with the fervor of a rabid dog.

But all things come to an end:

“All the people who made money during the gold rush in California, they were selling the buckets and shovels,” Gordon said. “I think there is gold in them there hills, but you’re going to have to dig deep. And hopefully you’re going to need more than one shovel.”


Carrington may start buying rental homes again when other large investors decide to sell after learning they can’t make returns that justify the prices they paid, Rose said.


“We’ll sit back in the weeds for a while and wait for a couple of blowups,” he said. “There’ll be a point in time when we’ll be happy to get back into the market at levels that make more sense.”

If the Chairman is serious about tapering, or even hinting of tightening at some point in the future, those blowups won't take too long. And so will the blowup in the illusion that the housing market is "recovering" on anything more than yet another cheap-money fueled bubble afforded to a select few who now have no choice but to "hot potato" properties amongst each other first on the way up, and soon, going down.

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CrashisOptimistic's picture

Yes, there was some stupid money buying mold infested Florida foreclosures for renting out.  There was some stupid money buying all sorts of foreclosure trash the banks packaged to get rid of first all over the US.

And Carrington was some of it.

Midas's picture

+1 for the "model" home in Sudden Valley.

Big Slick's picture

There's always money in the banana stand.

Gene Parmesan's picture

Too bad they burned it down.

Hippocratic Oaf's picture

"As stupid money jumps in"

At the request of Goldman I assume

CPL's picture

go long


+3.28 (33.62%)


Stewart Enterprises, Inc. is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, it provide a range of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. The Company operates in two segments: Funeral and Cemetery. As of October 31, 2010, its operations included 217 funeral homes and 140 cemeteries in 24 states within the United States and in Puerto Rico. It operates one or more of the death care facilities in each of its markets, which are in larger metropolitan areas in the Southern, Western, Mid-Atlantic and Mid-Western states. It operates its funeral homes and cemeteries in clusters. Clusters are groups of funeral homes and cemeteries located close enough to one another that their operations can be integrated. In October 2012, it purchased Garden Oaks Funeral Home in Houston.EI

knukles's picture

That's the Bluth house!

Kudos, Tyler!

eclectic syncretist's picture

And I thought Bernanke and his butt-buddies were always slipping IN the backdoor.

asscannon101's picture

"I've made a terrible mistake..."

asscannon101's picture

"I have the worst fucking lawyer..."

TheEdelman's picture

Dont care what ppl say.  Arrested Development has still got it.  The model home has all kinds of win.  No garage, no driveway and half the (1story) house is gawdly turret.  

PiltdownMan's picture

Households NOT jumping in. Look at MBA purchase applications. As smart money runs, dumber money flows in. See this guy's writeup.

asscannon101's picture

Anybody else watching the new Season 4 episodes on NetFlix? Tobias needs ANUSTART!

Midas's picture

I'm two episodes in.

Only thing that picture needed was a stair-car. 

Better head out 10 minutes early, there's a headwind.  And look out for hop-ons, you will get some hop-ons.

Buck Johnson's picture

Arrested development house, lolololo.  Also this is the classic pump and dump in slow motion.  They needed the housing market to go up and the govt. helped to entice the big money people to buy bunches of houses to "rent".  Once people saw  big money funds buying everyone thought it was the new gold rush and where going in.  Now or last few months they have been selling their properties high (since they where the first ones in, just like a ponzi scheme) and take a profit and leave the others holding the bag.

When we thought individuals and companies wouldn't fall for it again, they did with the help of the govt..

Oh regional Indian's picture

Homes, Education, healthcare and food..... these should never be considered asset classes or speculative investments.

The "home" story will end in tears when who-ever is goosing REITS finds a swan of a particulary dark complexion and/or rising interest rates.

Either-way, the front-end of the ponzi is now education and "homes".


CrashisOptimistic's picture

"Homes" is real estate industry bullshit.

There are no "homes".  There are houses.

Oh regional Indian's picture

Homes, Home-land Security... see?

House-land Security just does not have the same ring to it ;-)

JR's picture

As in developing nations, the bankers have used debt to control even Americans’ most treasured possession – their home. By manipulating and accelerating the mortgage industry over the past 50 years, realtors, insurance companies, HUD/Fannie/Freddie, and every level of government from city to federal have been loaded onto the homeowner’s plate.

Young couples can only afford a house by joining this expanded debt industry.

Lately, however, the stage scenery has been changed. The banking cartel, using the leverage of government, can now almost completely control not only home prices but a home's financial security by turning homes into an investment casino manipulated by the Fed, Wall Street, and the government.

It turns out William Pitt would be mistaken about the American government's access to an American home, unlike in his England. In America, the King may enter; the King -the Fed - has the key:

"The poorest man may in his cottage bid defiance to all the force of the crown. It may be frail; its roof may shake; the wind may blow through it; the storms may enter; the rain may enter--but the King of England cannot enter; all his forces dare not cross the threshold of the ruined tenement." -- William Pitt, Earl of Chatham

Or, as the resultant proverb went: “The wind and rain may enter the cottage of the most humble Englishman, but the King with all his might and majesty may not.”

Isabel Paterson describes the critical connection between property rights and freedom when an American has no place that he can call his property:

"There was no place on earth where he had a right to be; which is to say, he had no right to be."

And also: "How can a man speak freely if there is no spot on which he and his audience have the right to stand?"

Ahmeexnal's picture

Time to go short homes, long homeless.

object_orient's picture

A house is made of brick but a home is made of love. Surely your grandma had that plaque hanging in her kitchen somewhere?

JR's picture

After Bernanke cleaned out Grandma's saving account, Chase stole Grandma's house, er home, and took the plaque as well.

donsluck's picture

Everything is flexible. Real estate profits cannot be realized by top-heavy corporations. You have to be small and nimble. My house is paid for due to careful buy/sell timing. I agree with your assessment of education, although not the way you insinuate. There is no longer any economic advantage to a higher education, and it certainly is not indespensible, like housing, healthcare (NOT insurance) and food. It is entertainment for the rich.

HedgeHammer's picture

Correction, you only paid off your loan for your house. You do not own it and most likely never will. You have only lessoned your payment, but most assuredly still pay property taxes. It you would like to test the theory then try not making any payments for the property tax in which you "own" and we shall see just how fast that property of yours is repossessed.


Not trying to start a fight just trying to open a few eyeballs is all.

SoCalBusted's picture

Yes - and the expenses/payments that last forever cannot be negotiated or shopped.

Promethus's picture

Why wait to steal homes through taxes?  Thanks to the nine geniuses on the Supreme Court, anyone who wants your property can get government  to declare eminent domain and kick you out quick.


Promethus's picture

Why wait to steal homes through taxes?  Thanks to the nine geniuses on the Supreme Court, anyone who wants your property can get government  to declare eminent domain and kick you out quick.


optionsman's picture

education in the US is a speculative investment. actually not sure how it could be otherwise in the best of worlds when a student is making this investment. under other systems where a state would make such an investment it is less of a gamble but it prone to corruption. i dont think that either education or helthcare should be profit centers but thats a different conversation.

Homes or real estate is a different story. to the extent that investors can accurately assess all requisite premiums one should charge (liquidity premium for example) as well as on-going expenses associated with holding such an asset- i dont see why it cannot be speculative investment from an investor's point of view.

MachoMan's picture

education in the US is a speculative investment.

Holy fucking christ....  touchdown...  I get red arrows out the ass from stating the same thing (the obvious), but hopefully you get a free pass....

As a fundamental notion, if you borrow to do it, then it can't be anything other than speculation...  (if you have no intention to repay, then it's just stealing).

object_orient's picture

 education in the US is a speculative investment.

There's broad agreement on this because it's true. Can't you just leave it at that?


(if you have no intention to repay, then it's just stealing)

^ this is why you get the red arrows. Why do you keep excusing the incompetence of lenders who have no inclination to do their due diligence? If you were a lender, would you make these loans? The borrowers who default face real consequences: lower credit ratings, increased borrowing costs, wage garnishment, bankruptcy court rulings, etc. The lenders, who took a risk in exchange for interest on the loan, are subject to losses. Why the morality moaning and groaning? Aren't you a lawyer?

MachoMan's picture

I don't ever make excuses for lenders...  my entire comments are directed at shared losses...  make all the fucking idiots eat their poor decisions...  this goes for the welfare queens from the top (banks) to the bottom (obama phones).  The problem is that everyone is eager to discuss bank write-offs without actually addressing the underlying issues...  that banks are merely drug pushers in an ocean of demand.  No one wants to talk about the irresponsibility of debtors...  only the big bad banks...  in my book, they're both worthless...  it's just that one is more politically connected and, thus, more equal.

Insofar as the comment on stealing is concerned, it's directed at those who wish to call speculation something else...  In other words, if you had the intention of repaying, then you're a speculator...  otherwise, you're just a thief.  Now, that does not entail, in the slightest, that you will be able to repay or that you should repay, regardless of what conditions transpire after receiving the loan proceeds.  However, it does pose a vice to those who choose to call borrowing significant sums to pursue financial gain anything other than speculation.

The borrowers who default MIGHT face real consequences...  so long as the foreclosure process is stalled, many of these consequences are likewise stalled.  What is a bad credit rating amongst an entire nation of deadbeats?  The only cost of having a bad credit rating is when there is an investment opportunity you can't capitalize on because of your poor credit...  well, I'm not sure if you've looked around lately, but good investments don't exist...  there's shit and there's frozen shit.  Wage garnishment?  That would entail that the people have a chance to repay the loans...  otherwise, all that gets flushed in BK. 


CheapBastard's picture

Most markets are super-saturated with boxes---new, old, preused-- and yet they are adding over 8,000 new boxes north of me, mostly the no-money down type of stuff where the builder "finances" the deal thru "it's own lender" and pays all the title fees, etc. and throws in a BJ (as an added incentive).


However, I'll wait until the house market reverts to its norm and corrects somewhere near 40%. I'm in no rush and I would hate the feeling of living in a box that has lost 50% of its value (esp when you go to sell).


... and besides,


I'm a Cheap Bastard.



azzhatter's picture

I've owned a couple of rental properties for a long time. A lot of vaseline is required

TahoeBilly2012's picture

Hello Sacramento, goodbye Sacramento...though the Kings have a deal and they want to build a $300mil complex on the old K st mall...hmmmm.

camaro68ss's picture

If you build it, they will come. no longer rings true in todays times.

augustusgloop's picture

if you build it they will come never rang true. Here is the actual quote:

If a man has good corn or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods. —Ralph Waldo Emerson, Never anything about moustraps (until after his death), shitty subdivisions in the Inland Empire, NINJA 10 year car loans, or QE. 

astoriajoe's picture

that's sure some fancy book learnin' you got there.

therover's picture

"naught + naught = naught"

"Be quiet Uncle Jed....I'm a ciphering"



Meat Hammer's picture

Unless it's a fake stock market and one is a sheep.

WakeUpPeeeeeople's picture

Speaking of sheep, why do Scottish men wear kilts?

Because the sheep can hear the zippers.

As in the American people are the sheep and Bearded Ben is the one wearing the kilt.

12ToothAssassin's picture

And velcro gloves too. What are the three biggest lies in Texas? Thats my truck, I wont cum in your mouth and I was just helping that sheep over the fence.

prains's picture

Is there anything left in the american economy that doesn't depend entirely on a fantasy blown bubble? Could someone just invest money into making a useful product that isn't intended to kill,maim or injure either physically or financially.

Azannoth's picture

Single serve(throw away) property market any1? Kudos if u get the reference :)

Stoploss's picture

And i thought i was the only one who realized when they made everything a consumable, it started with houses.

If you own a "new" one bought in the 90's, you know exactly what i am reffering to.


Brand new to horse poo in under twenty years..

The structures don't last as long as the mortgage!!!   LOL!!

MachoMan's picture

Something the real estate bubble never forced anyone to do was realize depreciation for use of the home (or just the natural deterioration).  This is really the next leg down and keeps a ceiling on prices...  locally, a 20 year old home is selling as much as a new home with the same square footage...  it's fucking crazy.  The cost to rehab homes, even if built in the late 90s, plus the base cost is more than new construction (getting to build it the way you want it to boot).  Wild...

On the average home, I'd guess there would need to be an escrow of at least $200 set aside for maintenance and repairs every month...  obviously it's not going to cost that much every month, but if you keep it for 10 years, you'll end up having to rehab it to sell it...  presuming the market gets any dose of reality in the meantime....  and you can burn $25k in a hurry.

pursueliberty's picture

Where you at?  Sounds like Arkansas to me.

I can build a brand new home in a nice subdivision for less money than buying a late 70's/early 80's home and just upgrading windows, flooring/painting.  Not only that, but the bashing of new homes is totally uncalled for unless you speak of these giant spec builders.  A brick home is still as structurally sound as ever, slab engineering requirements now in many areas, etc.  The problem might be shit light fixtures and appliances, but honestly everything that uses electricity has a short self life now a days.  My wife owns a brokerage that is over a sub division development and all these homes have really low utulity bills.

MachoMan's picture

Yes, Arkansas.  Our market never had the build-up, but it really hasn't had its comeuppance either (NW Arkansas is a different story)...  we're adding so many people that old homes are going for new home prices...  which is doing nothing but leaving a lot of bag holders.  I can also say that many of those vintage homes (mid nineties) are total shit construction, no different than today's spec house builders (or really spec house builders of any time, but some of the 60s houses are actually pretty solid...  around here anyway).

12ToothAssassin's picture

Oh I get it. You think your clever dont you? Hows that working for you?