Big investors buy fewer homes but see bigger gains
Some credit them with saving the housing market. Others blame them for taking advantage of a crisis and bullying real homebuyers out of the American Dream.
Whatever their role, large institutional investors put a floor on home prices during the housing crash by buying up thousands of distressed, single-family homes. Now they are slowing their purchases, but not exactly getting out of the trade. They are holding on to what is becoming an increasingly lucrative asset: The single-family rental home.
"Prospects for the single-family rental market through the remainder of the decade are good," wrote Mark Zandi, chief economist of Moody's Analytics, in a recent study. "Rent growth is expected to accelerate this year, and average nearly 3 percent per annum though the end of the decade."
Before the housing boom and bust, single-family rental homes made up about 9 percent of the U.S. housing stock. Now they are about 13 percent and still rising, according to Moody's.
The number of single-family rental homes has increased 35 percent since 2006, to 15.1 million from 11.2 million, according to John Burns Real Estate Consulting (JBRC). Roughly 3.9 million owner-occupied homes became rentals in that time, versus 2.9 newly built apartment units.
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"While we expect the rate of single-family rental growth to slow as foreclosures slow, we believe the professional operators have a huge opportunity to build an investment-quality income stream out of what used to primarily be a mom and pop business," wrote David Guarino, senior research analyst at JBRC.
Even though apartment construction has increased dramatically in the past few years, rents continue to surge, as demand grows, and both are unlikely to abate anytime soon. The drop in the homeownership rate among middle-aged cohorts is a huge driver, as they often prefer larger single-family rentals over less family friendly apartments.
Millennials are also key drivers. In 13 million of the 22 million new households that will form between 2010 and 2030 the occupants will seek to rent, rather than buy, their homes, according to the Urban Institute. Families will likely continue to make up a larger-than-normal share of renters, as they try to repair their credit. Investors are well aware of that.
Institutional investors have put roughly $25 billion into the single-family rental market already in the form of 150,000 properties, according to a report late last year by Keefe, Bruyette & Woods; the seven largest single-family rental REITs own nearly 150,000 homes and are still buying about 10,000 per quarter, according to Moody's.
With 7 million homes lost to foreclosure in the past decade, and about half a million more in some stage of the foreclosure process, the rental numbers have nowhere to go but up. The change now is from larger-scale investors to smaller, individual investors.
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"As housing transitions from an investor-driven, cash-is-king market to one more dependent on traditional buyers, sales volume has been increasing over the last few months and is on track in 2015 to hit the highest level we've seen since 2006," said Daren Blomquist, vice president at RealtyTrac, a foreclosure sales and analytics company.
Institutional investors, defined by RealtyTrac as entities purchasing at least 10 properties in a calendar month, made up just 2.4 percent of single-family home sales in May, a record low going back to January 2000, the earliest month with data available.
During the worst of the foreclosure crisis, when investors were buying the most, the thought was that they would sell the properties as soon as home prices recovered; that has not been the case. Investors like Blackstone, Colony Capital and American Homes 4 Rent continue to hold and rent thousands of properties across a widening geographical area. They have put management structures in place, and are now even lending money to smaller investors.
There has been some consolidation. Atlanta-based investor Aaron Edelheit started his The American Home company in 2012 with a small fund and just 26 homes. In April of this year he sold the company and its portfolio of more than 2,400 homes to Silver Bay Realty Trust, a single-family rental REIT, for $252.2 million.
"This is the natural evolution of how the industry is growing up, said Edelheit in an interview just before the sale closed. "The apartment industry went through a similar thing and is now dominated by giants."