Tricky Transition for
Investment Homes
Feb 23, 2015
Bendix Anderson
Investors are buying fewer
single-family homes, according to data firm RealtyTrac’s 2014 U.S.
Institutional Investor & Cash Sales Report. However, many investors
continue to buy and seem committed to the business of renting out their
portfolios of single-family homes.
“The
single-family rental market has been around for a long time. It’s gotten a lot
of press recently, but it’s always been there,” says Mark Palim, Fannie Mae’s
vice president for applied economics and housing research. “It’s a key piece of
the housing market.”
Single-family
investors played a high-profile role in the housing recovery, as private equity
firms like Blackstone bought hundreds of thousands of foreclosed homes and
turned them into rental properties. Home prices rose dramatically in many
markets. Today investors are buying fewer single-family homes as their business
enters a new phase—based on a strong overall economy instead of a tidal wave of
foreclosed homes available at steep discounts.
“We are in a
tricky transition period,” says Daren Blomquist, executive vice president for
data solutions for RealtyTrac. “The main focus now is on rental income or cash
flow.”
Fewer investor purchases
Institutional
investors bought just 105,278 single-family homes in 2014—that’s 4.2 percent of
all sales. It’s also a steep drop from the 153,450 single-family homes these
investors bought in 2013. Over the past four years, institutional investors
have purchased a total of 528,369 single-family homes nationwide, or an average
of about 132,000 per year, according to RealtyTrac, which counts as an
“institutional investor” buyers who purchase 10 or more homes a year. Over
those four years, these institutional investors bought 5.61 percent of all
single-family homes.
“We are
seeing the investor surge wind down,” says Blomquist. “They are going to
continue buying though they are less aggressive.”
Meanwhile,
home prices are still rising, though much less quickly. Prices are likely to
rise 4.6 percent in 2015 and 4.0 percent in 2016 on the Federal Housing Finance
Agency Index, according to the latest forecast from mortgage giant Fannie Mae.
That’s solid appreciation, well above the rate of inflation. But that appreciation
would still be disappointing compared to 7.7 percent rate in 2013. “Home price
appreciation cannot become too detached from what is happening with household
incomes,” says Fannie Mae’s Palim. “People need incomes to support those
mortgages.”
Investors
are also providing less support to home prices. “Many investors have started
getting priced out of many markets,” says Blomquist. Average capitalization
rate for single-family rentals fell to 9 percent in 2014. That’s down from 10
percent, according to RealtyTrac. Cap rates represent the income produced for a
property as a percentage of the sale price. RealtyTrac bases its calculations
on the median home prices and the local Fair Market Rents computed by officials
at the U.S. Dept. of Housing and Urban Development. Blomquist expects cap rates
for single-family rental homes to stabilize in the coming years between 9
percent and 6 percent.
Policy
makers have recently taken steps to make it easier for potential homebuyers to
get a mortgage, including lower premiums for Federal Housing Administration
insurance programs. A strong job market may also help strengthen the housing
markets—including demand for both rental housing and for-sale homes. “We are at
a key transition point,” says Fannie Mae’s Palim. “We should see a pickup in
home sales.” More than 5 million existing homes should sell in 2015, according
to Fannie Mae’s latest forecast.
Investors hold their properties
Even though
appreciation is slowing, the largest investors remain committed to holding
their properties. “We are not seeing a lot of sales,” says Blomquist.
However, the
business of renting single-family homes is consolidating as the largest
companies buy the portfolios of mid-sized companies. The American Home recently
announced the sale of a portfolio of 2,460 single-family rental homes to Silver
Bay Realty Trust for $263 million. American Homes 4 Rent also bought Beazer
Pre-Owned Rental Homes Inc., in a deal announced last summer.
Leading
investor Blackstone, for example, shows no sign of selling. “They are very
committed to holding on for at least the next few years,” says Blomquist of
Blackstone’s huge portfolio of 45,000 single-family properties for rent. In
fact, Blackstone has sold bonds to Wall Street based on the rental income from
its properties. Rental housing operators like American Homes 4 Rent and
Starwood Waypoint Residential Trust have also securitized the cash flow from
their properties. These deal would make it awkward, to say to least, for the
firms to sell their single-family portfolios. “They are at least in these for
the next few years,” says Blomquist.
Investors
like Blackstone have also created a new way for other investors to put money
into single-family rental housing: as a lender. The private equity firm has
created B2R Finance. B2R stands for "buy to rent," and provides
financing tailors to investors who buy small properties to rent.
