The Rental Bubble Is Also Bursting

Tyler Durden's picture

Over the past year we have been closely following the slow motion bursting of the latest hot money, spec capital, and foreclosure subsidy-driven housing bubble, which has for now mostly impacted the peripheral areas like Las Vegas, where we reported housing demand has plunged by 20% while supply has exploded as everyone scrambles to cash out. The fact that the foreclosure wave has just turned and the number of California foreclosures recently exploded by 57% in one month merely is further confirmation of just how weak organic support for home prices truly was. And as the Emerging Market hot money wave turns (thank you taper) and as recyclable capital suddenly becomes scarce, look for this trend to hit the major metropolitan centers next, as even the wealthy investors finally pull back from the luxury US housing market.

However, even as the primary housing market was slowly circling the drain, the one silver lining was that the US rental market, largely dominated by several Wall Street investment firms, most notably Blackstone, was doing relatively well. It was doing so well that equity sponsors such as Blue Mountain couldn't wait to offload their prized REIT property to the public, culminating with last August's IPO of American Homes 4 Rent, the second-largest US homes-for-rent operator after Blackstone. And since the stock price of all these corporations was performing admirably or at all time highs, supported by the record fungible liquidity sloshing among the world's interconnected markets, nobody was very concerned.

It is time to get concerned.

Last night, American Homes 4 Rent (AMH) announced that Peter J. Nelson, its Chief Financial Officer, will resign his position, following a transition period, to "pursue other career interests. The company has begun the process of identifying Mr. Nelson's successor. Mr. Nelson is expected to remain with the company into the second quarter to complete the company's year-end financial reporting and to provide for an orderly transition for his replacement." That he made this announcement in such a hurry, without even having found a successor, speaks volumes about what is coming over the horizon.

For those who are confused about the significance of this departure, which may have marked the peak of the rental property bubble, here is a Bloomberg report that was released concurrently with the AMH announcement, and which confirms that the rental bubble has indeed popped.

Rents collected on the collateral for the first U.S. rental-home securities declined by 7.6 percent from October to January, according to Morningstar Inc.

 

Payments declined as expiring leases and early tenant departures left residences backing the bonds of Blackstone (BX) Group LP’s Invitation Homes vacant, Becky Cao and Brian Alan, analysts at Morningstar’s credit-ratings unit, said in a report. While 8.3 percent of the properties were vacant or occupied by delinquent renters in January, renewals on 78.5 percent of leases that expired the prior month exceeded the analysts’ expected rate of 66.7 percent.

 

The deal’s performance is being watched as Wall Street bankers and institutional property investors seek to follow Blackstone’s $479.1 million transaction in November with additional offerings. Initial lease expirations for the 3,207 homes are scheduled to peak from January through March, Morningstar said. To woo investors and rating firms in the new market, the transaction started with all of the units leased, unlike bonds backed by apartment-building loans.

 

One dealer was offering to sell top-rated notes from the Blackstone transaction for about face value today, according to Empirasign Strategies LLC, which tracks securitization-market trading. Some riskier slices were being offered by JPMorgan Chase & Co. for less than par last month, people with knowledge of trading said then.

And following today's Walmart news of yet another ugly quarter (with guidance for more to come), not to mention recent retail sales and general abysmal economic reports, we can only conclude that what was once America's middle class will soon be homeless, and using an EBT card for all their dining needs... but at least it will have unlimited and free global texting opportunities courtesy of Whatsapp, not to mention constant blasts by NSA, pardon, Facebook-hosted IP-tracking cookie enabled ads. The good news: since the polar vortex is largely over, at least sub-bridge living will be in largely balmy conditions if only for another 6-9 months.