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Housing Industry Frets About the Next Brick to Drop
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year.
The PE firm’s subsidiary Invitation Homes, doped with nearly free money the Fed’s policies have made available to Wall Street, has become America’s number one mega-landlord in the span of three years by buying up 46,000 vacant single-family homes in 14 metro areas, initially at a rate of $100 million per week, now reduced to $35 million per week.
As of September 30, Invitation Homes had $8.7 billion worth of homes on its balance sheet, followed by American Homes 4 Rent ($5.5 billion), Colony Financial ($3.4 billion), and Waypoint ($2.6 billion). Those are the top four. Countless smaller investors also jumped into the fray. Together they scooped up several hundred thousand single-family houses.
A “bet on America,” is what Schwarzman called the splurge two years ago.
The bet was to buy vacant homes out of foreclosure, outbidding potential homeowners who’d actually live in them, but who were hobbled by their need for mortgages in cash-only auctions. The PE firms were initially focused only on a handful of cities. Each wave of these concentrated purchases ratcheted up the prices of all other homes through the multiplier effect.
Homeowners at the time loved it as the price of their home re-soared. The effect rippled across the country and added about $7 trillion to homeowners’ wealth since 2011, doubling equity to $14 trillion.
But it pulled the rug out from under first-time buyers. Now, only the ludicrously low Fed-engineered interest rates allow regular people – the lucky ones – to buy a home at all. The rest are renting, in a world where rents are ballooning and wages are stagnating.
Thanks to the ratchet effect, whereby each PE firm helped drive up prices for the others, the top four landlords booked a 23% gain on equity so far, with Invitation Homes alone showing $523 million in gains, according to RealtyTrac. The “bet on America” has been an awesome ride.
But now what? PE firms need to exit their investments. It’s their business model. With home prices in certain markets exceeding the crazy bubble prices of 2006, it’s a great time to cash out. RealtyTrac VP Daren Blomquist told American Banker that small batches of investor-owned properties have already started to show up in the listings, and some investors might be preparing for larger liquidations.
“It is a very big concern for real estate professionals,” he said. “They are asking what the impact will be if investors liquidate directly onto the market.”
But larger firms might not dump these houses on the market unless they have to. American Banker reported that Blackstone will likely cash out of Invitation Homes by spinning it off to the public, according to “bankers close to the Industry.”
After less than two years in this business, Ellington Management Group exited by selling its portfolio of 900 houses to American Homes 4 Rent for a 26% premium over cost, after giving up on its earlier idea of an IPO. In July, Beazer Pre-Owned Rental Homes had exited the business by selling its 1,300 houses to American Homes 4 Rent, at the time still flush with cash from its IPO a year earlier.
Such portfolio sales maintain the homes as rentals. But smaller firms are more likely to cash out by putting their houses on the market, Blomquist said. And they have already started the process.
Now the industry is fretting that liquidations by investors could unravel the easy Fed-engineered gains of the last few years. Sure, it would help first-time buyers and perhaps put a halt to the plunging homeownership rates in the US [The American Dream Dissipates at Record Pace].
But the industry wants prices to rise. Period.
When large landlords start putting thousands of homes up for sale, it could get messy. It would leave tenants scrambling to find alternatives, and some might get stranded. A forest of for-sale signs would re-pop up in the very neighborhoods that these landlords had targeted during the buying binge. Each wave of selling would have the reverse ratchet effect. And the industry’s dream of forever rising prices would be threatened.
“What kind of impact will these large investors have on our communities?” wondered Rep. Mark Takano, D-California, in an email to American Banker. He represents Riverside in the Inland Empire, east of Los Angeles. During the housing bust, home prices in the area plunged. But recently, they have re-soared to where Fitch now considers Riverside the third-most overvalued metropolitan area in the US. So Takano fretted that “large sell-offs by investors will weaken our housing recovery in the very same communities, like mine, that were decimated by the subprime mortgage crisis.”
PE firms have tried to exit via IPOs – which kept these houses in the rental market.
Silver Bay Realty Trust went public in December 2012 at $18.50 a share. On Friday, shares closed at $16.16, down 12.6% from their IPO price.
American Residential Properties went public in May 2013 at $21 a share, a price not seen since. “Although people look at this as a new industry, there’s really nothing new about renting single-family homes,” CEO Stephen Schmitz told Bloomberg at the time. “What’s new is that it’s being aggregated, we’re introducing professional management and we’re raising institutional capital.” Shares closed at $17.34 on Friday, down 17.4% from their IPO price.
American Homes 4 Rent went public in August 2013 at $16 a share. On Friday, shares closed at $16.69, barely above their IPO price. These performances occurred during a euphoric stock market!
So exiting this “bet on America,” as Schwarzman had put it so eloquently, by selling overpriced shares to the public is getting complicated. No doubt, Blackstone, as omnipotent as it is, will be able to pull off the IPO of Invitation Homes, regardless of what kind of bath investors end up taking on it.
Lesser firms might not be so lucky. If they can’t find a buyer like American Homes 4 Rent that is publicly traded and doesn’t mind overpaying, they’ll have to exit by selling their houses into the market.
But there’s a difference between homeowners who live in their homes and investors: when homeowners sell, they usually buy another home to live in. Investors cash out of the market. This is what the industry dreads. Investors were quick to jump in and inflated prices. But if they liquidate their holdings at these high prices, regular folks might not materialize in large enough numbers to buy tens of thousands of perhaps run-down single-family homes. And then, getting out of the “bet on America” would turn into a real mess.
And getting out of the bet on China? China has long frustrated the hard-landing watchers. But maybe not much longer. Read… Housing Crash in China Steeper than in Pre-Lehman America
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I know one side effect of the current housing market: Legions of homeless people, everywhere. Homeless people on every street corner, holding signs saying "hungry, God bless" and "Anything Helps" and "Will Work for Food." Homeless people sleeping under the overpasses, homeless people walking on the streets carrying a small bundle that represents all of their possessions, homeless people shuffling past vacant storefronts with "For Lease" signs in the windows, next to the empty houses for sale; homeless people everywhere I look, everywhere I go.
I want to help, but what am I supposed to do, give a buck to every person on every street corner? I'd be broke in no time at all, there's just so damn many of them, they're everywhere. But, as Ronald Reagan said, I'm sure that "they're homeless because they want to be."
Yeah, right.
So we have to be concerned about the Bank owned overhang and the Bankster owned overhang?
Housing is an absolute disaster
These big mega-slumlords were an effort by TPTB, to try and get the housing bubble re-inflated. As usual, the results aren't what they expected, and the unintended consequences will end up biting the little guy in the a**, while the .1% walk off with bonuses and easy buy out money. Another theft program engineered by the free-money policy of the FED reserve. I'm FED-UP. These people should be in jail.
Rents are high as hell everywhere except the completely hopeless areas and nobody is dumb enough to buy in this inflated dejavu market. This is especially true if you take into account how few are working full time combined with the inflation of medical care education etc, and this article goes along way in explaining one of the primary reasons why. Bastards, let the bubble pop already
There is some truth to this, but rents are not balloning everywhere. In many lacations rents are falling because too many people jumped on the bandwagon of building apartments. The artificially low intrest rates causes more problems. Everybody hates bailouts that frequent this web page, but most are on the doll one way or the other. Lets get rid of hypocracy.
I don't see the economics here. A renter is not going to maintain the property and taxes and insurance have to be paid. When the renter leaves the owner has to refurbish the house (to some degree) for the new renter and forgo income for an unknown amount of time. Upgrades over time have to be made. If there are a lot of rental properties in a given neighborhood the values of all the homes tend to trend downward. Newly formed families can't afford the rental income anyway and pay their student loans so what class of people do you get as renters? Workers in nomadic industries that may or may not be OK?
In 2009 you used to be able to trade an old clunk Fiat, in some countries, for a condominium.
New Anonymous op as White House still ignores murder of American reporter Serena Shim in Turkey
California Dreaming
Stagnant incomes. Fewer families. Demographic dystopia. Mind boggling prices in relation to income and assets. Collapsing agriculture and infrastructure. Ocean foodstocks collapsing. Blue skies a memory. Militarized government presence ubiquitous. The earth trembles and Hollywood gives themselves the credit. The major "California" based mutinationals (a Who Owns Who of major perps if there ever was one http://en.wikipedia.org/wiki/List_of_California_companies#Z) exist there only in name and image, not in patronage, obligation, culpability, taxable assets or good conscience.
Answer? Silicon Beach near LAX and NSA West in Marina del Rey! An Elysian of disconnected cerebral cortexes running havoc on what's left (there are no rights and the center can't hold) of what was once referred to as a Garden of Eden, lo, but only four score and 2 years ago. Prediction: I'll get Cher's house in the 'Bu for a cool pound of gold in 2025. We'll burn it down as a surf sacrifice.
Plenty of families where I am in Cali. I live near an elementary school and can see hordes of illegal immigrant mom's trudging to school with a whole string of US born little tykes. They are followed a few ton of fat foul-mouthed young black chicks, unmarried and pumping out kids because the only way to get the really good bennies is to be a single mom with multiple kids.
Meanwhile my stepson and all his cousins have just settled into a simple life of living at home and playing on the xbox. They have jobs but at $9 - $12 an hour with zero benefits they have accepted that they will never be able to afford a house or start a family. So they console themselves with electronic entertainment.
Provides a little insight into what this state will be like in 10 or 20 years
Intriguing, isn't it, that there is the recently announced Blade Runner 2 as we here news reports that Bejing is no longer liveable due to air pollution; Rome is on the verge of banning cars, and Los Angles is an imploding mess. New York's communist mayor wants to create, what are essentially, rat holes for humans to live in so that he can stuff more taxpayers into NY. We do know that whatever the purported "demographics" of the US; we know they are lying. Bill Burr in one of his rants, states that there are 400 million in the US which seems about right since 40 million are illegals.
then there is California, just one giant cesspool of non-Americans for even those who have been "given" citizenship in the last twenty years are Americans' in name only. Or go to Washington State, which has been ceded to China; Seattle is now unliveable and the traffic considered the worst in the country.
Odd isn't it...giving away the country so that the World War II vets can be considered irrelevant and spit on. Blade runner: We be there.
There were very few first-time buyers bidding on foreclosures, which are mostly wrecks by the time they are sold, and first-time buyers couldn't get mortgages in the 2009-2012 timeframe.
It was mostly a good speculation by the big boys and they should come out ahead, although the overheads are probably much higher than they anticipated. The real estate professionals are probably peeved that the sales won't involve them. I don't think there are enough properties owned by these companies to affect overall prices, individual neighborhoods perhaps.
$20B buys an awful lot of shitty foreclosures...figure 70,000 - 80,000, but in some segments of the market, they'll be 20-30% of the for sale signs this summer.
I can speak to Queens/Brooklyn areas....Infuckingsane right now. Of course I thought it was 15 years ago when I didn't buy anything and bought midwest sfh rentals.
Regrets....I have a few....but I sleep well.
;)
boom town in las vegas. casino's full. restaurants and movie theaters busy. new cars everywhere. come to Nevada to live the american dream.
Las Vegas is the Miami of the West.....If you can't speak Spanish, maybe you should live and try to work somewhere else.
A s-i-l just left ther to move back to NY. Wouldn't put her kids in the high schools there. Her ex is with LVPD - with the anti-gang unit. His cruiser has a trunk with more weapons than those carried by a platoon. Last time we were there he was in a shoot-out at a Starbucks. The gang problem is huige - and kept hidden from the tourists (do't want to scare them). Meanwhile Lake Mead is dropping and they're rushing to complete a new water supply tunnel before the old one goes dry.
The economic model for Vegas depends on people spending money to travel there (via plane or long drive) and having money to lose/spend while there. It needs substantial amounts of electricity to survive - and water as well - though the water supplies are dropping (and with them, the abuility to generate cheap electricity). The big whales from Asia are going to Macao now - and the European ones are staying in London. Vegas depends on small time US gamblers and is facing more and more competition as states desperate for revenue are allowoing casinos all over the place....but hell.. even Foxwoods and the CT casinos are in trouble - while Atlantic City is near death... but NY wants to open MORE casinos all over the place.
Side note - was in Reno a little while back. What a depressing god forsaken place THAT is now.....
This is what happens when your country, Your Country, decides it is a halfway house for the world based on "white guilt." White guilt means to destroy your children's futures and your grandchildren's future because some idjat communist (can you say Oboma) has coalesced the "destroy American now" movement.
Gangs and hard drugs are the result. And people complained about prayer in schools. Yeah right. How dangerous those cathedraled hands are eh?
It's not Obama (alone) but his moron lapdogs in mainstream media, the FED, 90% of Federal workers, Hollywood, the Immigrant Movement (LaRaza and alike), teacher unions and on and on. There are so many factions that have a vested piece in the federal pie we have become a nation of cockroaches and leeches. Bush 1 started, Clinton continued, Bush 2 doubled down and BHO perfected the divide and conquer ... the middle class, white, hard working traditional American is now bleeding out from a thousand knife cuts.
ALL high level politicians are pro-immigration.
Why?
Because Big Business is pro-immigration.
Why?
Because immigration, combined with multiculturalism, is how the elites are GROWING the USA and the West.
Big Business is socialism?
NO.
Big Business is Capitalism.
Therefore, pro-immigration policies from Obama, Bush, Clinton etc are CAPITALISM.
Why am I the only person in america to see this?
Capitalism is when you provide a product or service at a cheaper rate than someone could do it for themselves. For example, when's the last time you built your own car or computer?
Just like some forms of sex is for love, some is for procreation, some is for fun, and some is rape. It's the same thing with different motives and outcomes.
You can't throw capitalism out the window because some people have used it to rape others. The alternative is that we go back to the stone age.
Big Business + Big Government = Rape of Americans
Call it whatever you want, this is the equation.
Because you are an f'n idiot.
Big businesses are fascists! Run by elitist fascists! Supported by oligarchical fascists in government and the judiciary!
Fascism is just a stepping stone on the planned path to totalitarian, dictatorial, communism; A.K.A. the NWO.
Thank you Doctor Gonzo.
I still hold to the general idea of house price and income. The average price of a house should be around 2.5 or so X the average income of an area. This is also based on normalized interest rates. Right or wrong, people care mostly about their monthly payment. Abnormally low rates have contributed to a rise in house prices just as much as these mega landlords.
Everything related this is so fucked up right now. Low income jobs, manipulated un-naturally low interest rates, longer than is sound mortgage terms and a return of the tiny or no down payment loans. Are we so stupid that when it busts again, we will hear again "who knew this could of happened". I think sadly the answer is yes and confirms to me the error in looking to the government to solve all our problems.
Coastal areas and places with better than average work availability I would expect 4-5 P/E but in general yes, I think 2.5 P/E is historically correct. Better yet, do like the Amish and Mennonites and pitch-in to put up houses and barns at material cost.
My family's been just north of NYC in the burbs for some time. My grandparents bought a pretty ramshackle 2 family house in 1948. It had been a two room quarry worker's shack in the mid 1800's, and had been added onto over the years.... two more rooms, lifted up and put on a foundation, second floor in WWI, plumbing and heating in the 1920's. Thye paid $12,000 for it - just about 2 1/2 times what my printer grandfather was making. My parents bouth the place in tha late 60's for $29,000 - again about 2 1/2 times what he was making as a typesetter. I completely renovated the place in the 1990's - but my parents wouldn't sell it to us - they viewed the place as a ball and chain, thouhg they kept it so my mentally ill brother could stay on one apartment. We got to cash out on our work and bought our own place - at the low point of the market after Gulf I for just over $300,000 - the median price of a house in Westchester for 1993 (we got a bargain). That old piece of crap house sold for over $500,000 when my parents died in 2004 - an insane amount considering what it was. Probably 6-7 times average annual income for the neighborhood. It's probably back up to that level now after a brief dip. Houses close in to NYC (within a half hour train ride) in a place with good schools are obscenely priced - but then Manhatanites who aren't ultra rich (who can aford private schools) don't want to raise kids in the City.
Brother sold his home in Arcadia Ca for 540,000 in 2008 ... then 2009-2015, a million Chinese millionaires moved to So Cal ... his plain 2,000 sqft home is now 1.6 mil on Zillow, go figure
Houses in many areas, esp NYC and Cali, are 300% - 800% overpriced.
The correction in those bubble areas will be felt much harder then Main Street where prices either never rose much or have already reverted to the norm.
<Riverside the third-most overvalued metropolitan area in the US> Anyone who's been to that shithole knows this is THE BEST time to unload! Riverside/San Bernardino were facing BK even; so this artificial ridiculous spike in home prices is just that.
Blackstone and others with large portfolios of s/f homes have not solved the management problems of such a reckless endeavor. It's difficult enough to manage a condo or apartment complex; managing a portfolio of separate and geographically diverse homes is a nightmare. Horror stories abound of poor landlord response re maintenance/repair issues. Also keep in mind that many localities make it exceedingly difficult to remove a non-paying tenant; it could be a 6-12 month process; in the interim, no income. When I first heard of this, I knew the numbers would never make sense, and then I realized that, as with eveything else, the plan is to have the losses socialized; there's no other logical explanation. I love the smell of croney capitalism (fascism) in the morning.
Apberu - My grandmother lived through the Great Depression. She told me "never trust a banker they love foreclosures." Didnt know fully what she meant until the last several years of bankers privatizing the profits and socializing the losses by bailouts.
I had a line of credit I defaulted on with Citizens Bank which is owned by RBS. My only ask to avoid default was to extend the term from 5 to 7 years. The underwriters at Citizens tried to get this pushed through but RBS said no. The reason was the same, RBS got bailouts from UK government.
The assets of the business was office equipment (servers) and intellectual property. The attorney from Citizens called me at night on his personal cell so it wouldnt be recorded in the office.
He was put in charge to repossess the servers bought with the line of credit. He told me to box all my old equipment I didn't use and he would turn that in. He did that because he explained I acted on good faith, was always a great customer and what happened was not right or fair. The rest of assets were intellectual property which the banks didnt care about. Good thing because the data And sites I owned were valued at $6 M.
So I didn't pay shit on $225k of debt, just took a hard nick on my credit for bankrupting it. But meanwhile the people of the UK got the bill and RBS the bailout. I am still in operation.
i knew the numbers would not work either, in the long run, but it won't be american homes for rent that suffers, they did and will make a fortune. it will be the idiots that buy the stock offerings, bonds, and local governments left to mop up the crap. that's the whole deal. it is called 'pump and dump.
anybody that ever owned a home knows how much trouble the upkeep is, and anybody that ever rented something in a small stand alone building (not multi-family or highrise) knows how much trouble the landlord had, how hard they had to constantly work to maintain things.
I know (unfortunately) a family who moves from house to house and squats for months on end by using the "just us" system to keep the landlord from throwing them out. It took me almost a year to get them out of the house (and about 7k in legal fees) and the only reason it was under a year is because I wasn't deemed to be covered under the law that restricts even further the rights of landlords. It was a lesbian couple and the "dude" in the relationship just outright forges any documentation that is asked for. I eventually found an outstanding bench warrant for embezzlement and vehicular theft from out west and provided that to the police chief. He didn't want anything to do with it and the state out west didn't want to extradite because a lack of funds. That is the dirty little secret, crime in fact does pay as long as it is little stuff like screwing over landlords. This couple have not been sanctioned to date because of their activities, she represents herself pro se in court so there is very little out of pocket costs involved. She was ordered by the court to pay back utilities and attorney's fees but she just thumbs her nose at the court and tells them she has no money. She keeps all ownership of vehicles, etc in other family members names so they can't be attached. This cunt is really a piece of work BUT she lives for practically nothing other than having to move every year or so. Oh, don't bother to call her last landlord, it will be an out of state phone call to her sister who is pre-briefed on what to say. What a piece of shit this family is, but they have figured out how to live practically free in rental houses.
which is when a landlord needs to get creative.. start with a big dump truck of stone in the parking lot, ( for repairs ) where they park their cars,
roofers repairing shingles at 2 am. pest control officers spraying skunk oil, use your imagination all perfectly legal,
this post is humor of course. I would never suggest such silly stuff
/s
The REVENGE series of books that came out in the 80's listed all kinds of great ideas like that which I have never forgotten...
I lived in a city long ago that passed rent control laws... some serious wipe-out of Lanrdlord equity overnight.
"Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year."
Another delusional shithead who thinks he is worth every dime.
another variation of pump n dump. Next on the news. Taxpayers stuck with the cost of cleaning up the carnage.
When their portfolios go underwater they will simply approach president Shillary to allow them to turn their properties into Sect. 8 dumps.
Guaranteed government income.
It will be touted as "good for the poor" by the liberal media.
Coming to a neighborhood near you. Not only will they blast music all night, but when you're tired at work the next morning and no one is home they just might invite themselves over.
Another double whammy for the middle class who "gets" to PAY to have section 8 scum live next to them.
section 8 - correct. i forgot about that. one of the other reasons why blackstone went into this - MORE GOVERNMENT subsidies, because they KNEW - the RENT WILL GET PAID by obama. the majority of this stuff is probably not employed people, it's section 8
If these PE firms are daft enough to dump their portfolios on the market all at once they get what they deserve. I thought they were managed by professional mgmt? Sounds like they missed Selling 101.
You can repeat that thought for every asset class. When panic hits and it's obvious the next crash is starting every holder of every asset class will rush to sell. The carnage will dwarf the last little crash.
In kind of a read between the lines wasn't the money raised by the IPO's making up for the loss the may suffer by dumping the properties en masse?
i cannot imagine that the demand for these properties is all that goood based on incomes and credit.Time will tell but regardless of the situation home prices are still way over in some markets . My son just rented a nice fully reabbed 2 bath 3 bedroom house on half acre in a decent area. The house was for sale for $180k for over 2 years and never sold. His rent is a very reasonable $1100. The owner who I know paid $100k and $50k to renovate .
House was on the market to rent for almost 6 months.It just seems so distorted and thats why I think housing will not ever come back to the pre 2006 madness.
Ashame that homes are now subject to dot com boom and busts. Had no idea so many firms bought all these vacant homes. The rent rape should prohibit some of the selling as yield is hard to find.
this reeks of another bailout by the firmly entrench central planners. blackdick is another arm of the bankster cartel with no real skin in the game. just another hedger playing with our money gaming us again...when do we get a say in the outcome? short these fuckers...
I know someone who played this game as an individual investor in foreclosed FL real estate. He already made back more than his entire investment a couple of times over from rents alone. It doesn't matter if prices go down again. Additional income from the properties is just gravy. The only investors who have to sell are the ones who overpayed for the properties in the first place. Otherwise they just keep the income stream flowing until the properties depreciate to nothing decades from now, raze them to the ground, and develop anew.
That would be most of them. I bought a couple of places cheaply, and though I'm tempted to make an exit, I haven't. However, a lot of the 2009-2011 buyers have sold. Couple that with renters finally throwing in the towel by either stacking 2 or 3 families in a single family dwelling or moving back in with mom and dad, and there will be a glut of empty investment homes with mortgages to pay. I see too many people looking to get into the landlord biz that have no clue how to work it. Just like the knuckleheads buying tech stocks in '99, they would get fleeced, but it will be the taxpayers who take it up the ass again on real estate by way the banks getting more bail out money.