Many Americans, judging by the continued state of economic affairs — somewhere between uninspired and uneven, depending on the week — appear unable to help themselves.
Economist Heidi Shierholz at the left-leaning Economic Policy Institute estimated in May that 4.4 million people have left the labor market since 2008 due to a lack of jobs, numbers that map onto similar estimates made at the conservative Heritage Foundation. Those numbers have only grown since that time.
Without a robust job market, the taxpayer has largely remained on the home-buying sidelines. This, despite the fact that 88% of all U.S. cities saw single-family home prices increase during the third quarter, according to the National Association of Realtors.
The HousingWire Person of the Year in 2009 was, in fact, the American Taxpayer. Back then, the strength and might of the taxpayer was leveraged through various government programs to help keep our nation’s housing finance machinery intact and functional.
In the few short years now passed, however, the taxpayer’s role in housing is diminished and depleted. The public at-large has no way (and likely no willingness, either) to stand behind another massive bailout. And there are active efforts afoot in Congress to reform government cash cows Fannie Mae and Freddie Mac, who returned record or near-record profits in the third quarter and have now nearly repaid the government.
The Federal Reserve’s ongoing quantitative easing programs helped make all of this possible for the government-sponsored enterprises, too, a sort of virtuous cycle where low rates led to mortgage demand that could only be met via government-sponsored lending. By keeping rates low, mortgage-refinancing demand soared — driving refis to near all-time highs, and boosting lender profits at the same time.
While that may have helped mortgage markets in the short run, refinancing activity ultimately doesn’t drive demand for and growth in housing. That comes from household formation and jobs.
WHITHER THE TRADITIONAL HOMEBUYER?
So where are today’s would-be homebuyers? That’s easy: they’re living at home with Mom and Dad.
Julie Zisfein wrote in the Maximus Advisers blog an excellent wrap to this pathos. As she notes, the Census Bureau reports homeownership and household formation remain largely unchanged at 65 percent. “The prolonged period of economic uncertainty has led many young adults to move in with their parents, and they have stayed put well into this year,” she wrote.
“Additionally, without the organic housing demand, the onus of the housing recovery is placed on investor purchases, which drives up home prices, further discouraging would-be homebuyers from forming households and thus purchasing homes,” she added.
“Additionally, a slowdown in household formations, without an accompanying decline in homeownership portends subpar apartment absorption.”
So while Zisfein may bemoan the presence of investors in the housing market — and she likely has a valid point on potential long-term damage — it‘s more important to acknowledge that without the investor, the short-term outlook of this nation would be summed up in just one word: screwed.
That’s because in this recovery, the consumer is conspicuously and largely absent. Consumer confidence in housing significantly fell in October. Most taxpayers were turned off by the federal government shutdown and the ongoing debt ceiling debate, taking a clear toll on most Americans’ outlook toward the housing market. The share of consumers who believe it’s a good time buy a house declined to 65% during October 2013 — a new all-time low — while the number of those who believe mortgage rates will go up in the next year also fell to 57%, according to Fannie Mae’s monthly survey. (So not only is now not a great time to buy, but there also isn’t a lot of perceived impetus to buy now, either.)
It’s important to note that the survey was conducted primarily in the first two weeks of October — before the government shutdown ended and the debt ceiling agreement was reached. But sentiment has been trending in the same direction for months, well before the shutdown.
And while consumers may be sensing that rates won’t rise dramatically right away, they are still rising nonetheless. According to Freddie Mac’s weekly Primary Mortgage Market Survey, the average rate on a 30-year mortgage stood at 3.34% the first week in January. Today, that rate is at 4.16%.
“Affordability has worsened: both rising mortgage rates and rising home prices have pushed more homes out of reach of the middle class, which would also lead to a decline in people thinking it’s a good time to buy,” said Trulia chief economist Jed Kolko.
The gap between the share of consumers who say the economy is on the wrong track and those who believe all engines are a go widened from 16 percentage points in September to 40 percentage points in October — a record month-over-month change, in the same Fannie Mae data.
Nonetheless, the steep decline in Americans’ housing sentiment doesn’t seem likely to derail the momentum in U.S. housing, according to Fannie Mae senior vice president and chief economist Doug Duncan.
“While this decline in consumer optimism may portend a slowing of the housing recovery, supply constraint data suggest that we are likely to see continued positive growth in home prices,” Duncan said.
As if that weren’t already enough: The road for the U.S. taxpayer appears set to only get worse in the months ahead, too. The share of consumers who said their personal financial situation would get worse in the next 12 months hit a new high of 22%, according to Fannie Mae.
NO CONSUMER? NO PROBLEM
And so the average American is out of the picture, out of work and out of business. For investors in housing, however, business has never been better.
While it’s difficult to quantify investor activity, a decent proxy can be the absentee purchaser — that is, homes where the tax bill is sent to another address.
According to data provider DataQuick, in 2012, Los Angeles saw 25% of home sales go towards absentee purchasers. At the peak of the housing market in 2005, only 11.5% of purchases were going to absentee purchasers.
Los Angeles isn’t alone. Miami saw 42% of sales going to absentee purchasers in 2012, while the 10-year average in the city is 33%. In Las Vegas, 51% of sales transactions were classified as absentee, versus a ten-year average of 41%. Other cities tell the same story, over and over again.
Those numbers are buttressed by anecdotal evidence from real estate sellers. Micoley.com, an online auction website, recently held a September auction so successful that a larger-than-ever number of offers arrived before the actual auction date.
“There is no question that investors stepped in when buyers stepped down,” said Wade Micoley, CEO and president at Micoley.com. “A very high percentage of assets Micoley.com sold over the last four years for both financial institutions and private sellers went to cash investors.”
“We have been in the real estate industry for over 30 years and have sold through many up and downs, but nothing like what we have seen from 2009-2013. The market is always changing, seller’s market to buyer’s market and recently a heavily influenced investor market,” Micoley added. “As the market prices dropped significantly investors found very eager sellers and a low amount of prepared buyers to jump in at that shaky moment of our industry.”
The big trend in 2013 is investors moving upstream from REOs to short sales and trustee sales. “We’ve seen tremendous activity at trustee sales by institutional investors in California, Texas and Georgia, for example,” said Rick Sharga, an executive vice president at the nation’s largest auction house, Auction.com.
According to Sharga, the other big trend is the emergence of the institutional investor. “Now we’ve seen the creation of a new asset class — single family rentals — that isn’t likely to be a short-term fad,” Sharga added. “These properties meet the need for rental properties during a period of relatively low home ownership rates, and as the basis of REITs, probably represent an ultra long-term hold.”
From Sharga’s desk, he notes that investors were very active in those markets where low-priced properties dominated, and helped clear out the overhang of vacant and distressed homes in those markets. This has benefitted local economies by creating jobs, increasing retail sales of home improvement supplies and bolstering the tax base.
Based on sales in 2013 at Auction.com, investors are now migrating beyond the hardest-hit distressed metros, and moving into secondary markets where home prices are still low enough to allow for adequate returns on rental income on a yearly basis. The rapid increase in home prices has led to the return of “flipping” by some smaller investors, who often buy properties at auction, and subsequently sell them off to other, larger investors.
Investors played a huge role in 2013 in housing, but not one that dramatically shifted the market landscape, Sharga argues. “I would take issue with those who say it’s an investor-led recovery — they’ve accelerated the recovery, and particularly home price appreciation, but the market would be recovering anyway,” he said.
Home prices jumped 12% on a year-over-year basis in September 2013 compared to a year prior, posting the 19th consecutive monthly year-over-year gain in home prices nationally, according to CoreLogic’s latest Home Price Index report.
Most of that growth didn’t stem from distressed property activity. CoreLogic’s data showed that home prices grew 10.8% year-over-year, excluding distressed sales activity.
“September marked the unofficial five-year anniversary of the start of the housing crisis,” said Mark Fleming, chief economist for CoreLogic. “The five-year home price appreciation for all homes in the nation was 3.4%. While there is still room for improvement, the CoreLogic HPI is at the highest level since May 2008.”
A five-year high in home prices, with at best anemic job growth, no new household formation, and a new home market that remains a shell of its former glory? You can thank investors for making that happen.
TWO TYPES OF INVESTORS
When HousingWire named the investor Person of the Year it references, really, two distinctly different types of money. One for mortgages, and another for housing. Both are important.
Mark Roberts, head of research and strategy at Deutsche Bank Asset & Wealth Management, recently explored the impact of the former in an allocation to listed real estate on a multi-asset class portfolio from a risk and return perspective.“Real estate can be viewed as a hybrid asset class that combines stock-like apprecation and bond-like yields — but despite its similarities to stocks and bonds, the risk/return profile of real estate cannot be replicated synthetically, making it a unique asset class,” Roberts wrote in the report. Real estate has historically offered a consistent cash flow, an inflation hedge, attractive returns, and low correlations to other asset classes, which make it a good diversifier, Roberts explained.
One class of investor, mortgage investors, has been able to easily access the real estate asset class through publicly-traded (or listed) REITs, as well as other qualified-investment vehicles. Mortgage investors are an important part of the investment ecosystem, as they either directly or indirectly fund growth in mortgage lending activities through investments in REITs and related vehicles — allowing lenders to meet rising demand for mortgages with an expanding pool of capital available to provide it.
That said, the mortgage investor, more than anything, tends to be along for the overall ride when compared to the housing investor, who deserves much greater thanks for driving this round of recovery. Housing investors, whether institutional or otherwise, take more direct risk on the physical asset, and — in most cases — don’t need access to mortgages to fund their all-cash investments.
WHAT INVESTORS DO
There is a strong perception in the public sphere that investors buy and flip properties — with the word “flip” meaning different things to different people, but almost universally a pejorative.
Interestingly, however, a different picture of investor activity has been emerging post-crisis: that of the real estate holder instead of the real estate flipper.
According to data provided to HousingWire by RealtyTrac, only 22% of investor purchases during January 2011 through September 2013 were subsequently resold during that same time. That means investors held onto a whopping 78% of their purchases. And that number changes pretty dramatically, depending on how much investing the investor is doing — with investors purchasing 500 or more properties turning over only 5% of their purchases.
Housing investors aren’t selling: they’re holding. And, in many cases, they’re renting to the very people that can no longer qualify for a mortgage — the same U.S. taxpayer that was our Person of the Year just a few short years ago.
A NEW ASSET CLASS EMERGES
Mom & Pop, as far as housing investors go, tend to be onesie-twosie with their purchase activity, never holding more than a few properties and only holding them as long as needed to get a return. Not so for a new class of institutional housing investors. Many of these newer housing investors have tapped into traditional mortgage investment sources to fund their direct housing investments, with companies like American Homes 4 Rent, moving to IPO this year; and many more filing for REIT status, whether publicly-traded or not.
These investors aren’t buying one or two homes and then reselling them. They’re amassing huge portfolios of properties and instead renting them out, usually to those who can’t otherwise afford to get a mortgage.
Emblematic of this new class of investor is Blackstone Group’s Invitation Homes unit, which has spent nearly $7.5 billion to amass a portfolio of nearly 40,000 single family homes — and is the first to move to securitize the rental cash-flows being generated by a portion of its holdings.
“We started buying properties when the markets were down, individual markets [down] between 35% or 40%,” said Stephen Schwarzman, co-founder and CEO at Blackstone in an interview with Co-Star, the commercial real estate information provider. “What we tried to do was not buy assets all over the country in some kind of scattershot way. What we tried to do was limit our purchases to certain markets where we thought that the recovery would be quite good.”
The Blackstone offering, called Invitation Homes 2013-SFR1, came to market in early November. It’s the first pure-play single-family residential rental securitization to date, but it won’t be the last. For one thing, this inaugural securitization represents less than 10 percent of the Blackstone portfolio.
For another thing, other investors are lining up their own portfolios of single-family rentals and eyeing their own liquidity event via securitization: investors like Silver Bay Realty and Colony Financial. American Homes 4 Rent, currently the second-largest landlord for single-family U.S. homes with more than 21,000 rental properties in its portfolio, said it would look to market its own securitization in the rental space early next year soon after the Blackstone deal successfully priced.
Analysts at KB & W suggest that the party for rental securitizations may just be getting started, too: Returns on equity for these transactions could routinely rise above 15% for investors, they predicted in recent research note.
A CASE STUDY: PITTSBURGH
As you’re reading this, the Oscar-contender “Out of the Furnace,” starring Christian Bale and Casey Affleck, should be nearing release (on Dec. 6). The story tells the tale of a family of steel workers and soldiers who have seen better days. And so it is suitable that most of the movie was filmed in Braddock, a suburb tucked along the Monongahela River in East Pittsburg, Pa. Braddock, too, has seen better days. It is a former steel town, but is now a relic of that history. After the steel boom dried up, Braddock’s decline began slow and steady, and as of the 2010 Census there are only around 1,100 households remaining, about 10% of its peak in the 1920s. Braddock, like many other neighborhoods in Pittsburg — Allentown, East Liberty, Knoxville, Mount Oliver — is fighting for its life.
Of course all real estate is local, and Pittsburgh is no different. Despite being gutted by the crack epidemic of the 1980s and the collapse of steel, Pittsburgh is surprisingly without its share of war zones, like Los Angeles or Chicago.
Andrew Redlinger, one of the co-founders of RHO Enterprises — the Pittsburgh franchise of HomeVestors of America, better known as the “We Buy Ugly Houses” people — grew up across the river from Braddock. After getting an education to become a civil engineer, he wanted to help get neighborhoods such as Braddock on their feet as much as possible. Besides, he’s handy with a hammer.
Without housing investors in communities such as Braddock, where the median income is around $20,000, people would literally have no place to call home.
“In Pittsburgh, there’s no money for someone who wants to own in the $30,000 to $100,000 range unless it is an investor,” says Redlinger, adding that a second HomeVestors franchise is now also active in the city, as demand has been so great.
“We talked to people who lived their whole lives in a neighborhood and then they see us there,” he said. “They know it’s a rental, they understand what’s going on. And, ultimately, our presence will be viewed as a good thing, we put in a few dollars and it’s now a nice place to live.”
Before the economic crisis, homes in that range would’ve been a purchase mortgage, possibly of the riskier variety. That has all ended, but the demand for the homes did not. Pittsburg may be different for so many reasons, but the end is always going to be the same. And the past days of easy mortgage credit are not coming back — soon, anyway. Investors lead the America’s housing revolution now, for better or for worse.
“Each asset class and individual market will have their own re-definition. I say that because we believe this will not be a recovery but a re-definition of our industry,” said Wade Micoley. “It’s a new world, banking has changed, builders, developers changed and homeowners changed,” he said, taking a pause to reflect further.
“I hope it’s for the better!”
