Bulk Investors And The Real-Estate 'Recovery'

Via Ramsey Su of Acting-Man blog,

Bulk (Wall Street) buyers have been receiving a lot of attention recently. It's time to take a closer look.

There is little data available pertaining to bulk investors and even less meaningful analysis. Historically, Wall Street has never been active in direct ownership of single family homes, so there is no past histrory to learn from. We need to start from scratch.

How big are these bulk buyers? A few months ago, I read a report that Keefe, Bruyette & Woods estimated Wall Street had raised $6 billion to $8 billion so far, which is really a paltry sum in the world of high finance. It is impossible to estimate how much small investors are adding to this investment pool. We also have no clue how much this pool may grow over time, or whether it will  soon be exhausted and shrink instead.

Investors typically buy lower end properties. Say at an average of $100,000 per unit, the $6 billion to $8 billion raised so far would not even amount to 100,000 homes.

On the national level, and using the most recent releases, Existing Homes Sales and New Homes Sales combined are coming in at a pace of just over 5 million for 2012. The median price is $178,000 for existing homes and $242,000 for new homes. 100,000 homes would not even show up on the radar.

As for foreclosures, there are 5.6 million total non current loans in various stages of default. The current estimate for under water mortgages still exceeds 10 million, or about 20% of all mortgages. The Wall Street bulk investors are unlikely to put a dent in the distress property arena for the foreseeable future. In comparison, when the Resolution Trust Corporation (RTC) was dissolved back in 1992 due to the sunset clause, investors cleaned the entire inventory of REOs and loans off the books with just a few auctions.

On the localized level, it is a slightly different story. I am going to use three Western metro areas as examples. Phoenix, Southern California and Las Vegas were hotbeds of the subprime bubble and are once again the most sought after areas, this time by bulk investors. Using September data from DQNews, investors purchased 38.6%, 27.3% and 48.5% of all sales respectively. The actual number of absentee buyers for the four areas totaled 9,885 for the month of September. I expect this number will grow for the current months and into the near future, as investors eagerly place their funds. There is no data that separates absentee buyers into specific classes, such as Wall Street funds, local syndicates or small investors. However, if the bulk buyers are actively accumulating in these select markets, it is safe to assume that they do have some influence. The question is for how long.

Of the aforementioned metro areas, Las Vegas is the most out of whack. There were 4,570 sales in October.  50.2% were sold to absentee owners, 52.5% in cash (43.2% were short sales, 16.7% were REOs) and 36.1% FHA financed. I have never seen a market where over half of the buyers paid cash and over 1/3 of the sales were financed via the FHA, leaving only 14% of sales in the "other" category.

In just the months of September and October, Las Vegas sold 4,278 single family units to absentee owners.  Assuming a majority of them will show up as rentals soon, if they haven't already, how much more can the market absorb? If this trend continues, how many months will it take to swamp the desert with single family rentals?

Even more out of whack is the "it's cheaper to buy than rent" theory. I am not disputing the math but rather the conclusions.  Just the fact that it is cheaper to buy does not mean that renters should buy. Maybe housing is simply unaffordable and rents are way too high.  As the supply of rentals continues to increase, natural economic forces should be driving down rent and home prices. Furthermore, if renters are buying because it is cheaper than renting, won't there be even more pressure from this supply of rentals? Where are the additional 2,000 renters going to come from each month?

Finally, it is mind boggling that they are still building in this market. Here are some of the new homes for sale.  Just this website shows 100 communities on the market.

As an investor, why would I touch the Las Vegas market? Check out the popular websites such as craigslist or rentals.com. There are countless houses, condos and apartments for rent, all chasing after this phantom demand.  Cash investors have to ability to lower rents to the level that the market will bear, but can current investors compete? With so many renters, are neighborhoods going to deteriorate, driving even more under water mortgages into foreclosure?

I took a number of these rentals in Las Vegas and did a quick analysis on their return. It is impossible to come up with a reliable vacancy allowance. It is entirely possible for a bulk investor today to be sitting on a bulk of vacant houses tomorrow. While the option exists to lower rents, that can cause a chain reaction which may result in more foreclosures, more distress properties and a new round of depreciation in value.

Phoenix was probably the first region to experience an investor driven rebound. The most recent data from DQNews for September are already showing a sequential as well as a year over year decline. I am eagerly waiting to see what the October statistics will look like. Is that recovery already running out of steam?  The median price has been appreciating to $155,000 but it is still 41.3% below the all time peak of $264,100 in 2006. I am not suggesting that the subprime peak was reasonable, just that there is still a boatload of homeowners who have little or no equity in their homes.

Here in Southern California, the herd mentality is in full control with buying increasing at all levels. How long will this feeding frenzy last? Will the bulk investors be able to generate enough returns to whet their appetite for more? Will the local investors continue to ride on the coattails of the Wall Street moguls? Will owner occupiers continue to overpay for new homes because the 1%ers are paying cash and squeezing them out of the non-FHA market?

Stay tuned.


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