Foreclosures: Who Will Buy?

The pendulum is swinging towards a rentership society, according to Housing Market Insights from Morgan Stanley Research (Chang, Tirupattur, Egan). Here’s the present “lay of the land” for shelter nationally:

83% is Single Family Housing (SFH): Owner-occupied SFH 59%, Renter SFH 16%, Vacant SFH 8%

17% is Multi Family Housing (MFH): Owner-occupied MFH 2%, Renter MFH 12%, Vacant MFH 3%

There are more SFH rentals than MFH rentals, so “renting” no longer implies “apartment." The U.S. home ownership rate is about to drop below 60% for the first time since the 1930’s, and it would already technically be there if it were not for the unusually long foreclosure process. Though the SFH rental supply is still increasing, overall rental demand continues to exceed rental supply. Over the past couple of years it’s been “good news for landlords, bad news for renters” as vacancy rates and residential rental yields have improved briskly.

So what’s a family who requires shelter but doesn’t have the adequate down payment or credit score or default-free record to do? Rent.

Looking at the big picture for single-family, today might just mark the perfect storm of increased rental demand, low asset valuations (housing prices), and historically low interest rates. Add to this that the ownership of single family rental properties is extremely fragmented, and you have the seeds of opportunity.

So who will buy? I think it’ll be investors to the rescue (after all kinds of help from our federal government, as usual). We’re in the aftermath of an unsustainable run of increased home ownership, which resulted in a lot of people, big and small, getting hurt. The Federal Reserve is still fighting to keep interest rates artificially low for an extended period of time. Fannie and Freddie have continually delayed foreclosures and extended mortgage relief programs.             

So what’s an investor (who’s not already exceeded their desire to own residential rental property after becoming a “reluctant landlord” on their own) to do?

To participate in multi-family residential rentals, it’s easy. REITS (Real Estate Investment Trusts, a tax-advantageous business structure for companies that hold a portfolio of properties) trade publicly and there are many choices are available.   

To participate in single family residential rentals, it’s not that easy yet. But don’t worry because free market capitalism will soon reshape the landscape. And then investors, big and small, will step in to benefit. But big investors shall take the first steps.  

Waypoint Real Estate Group, founded in 2008 and already the nation’s leading acquirer of distressed single family properties, has just announced they will purchase and lease $1 billion in single family homes over the next two years. This is a very nice press release, who will not stand and cheer as these “private equity vultures” swoop in and help to clean up the foreclosure markets? Waypoint is backed by GI Partners, a private equity firm (accessible to big investors only). Many expect more companies to follow Waypoint, and in time it is likely that some of these companies adopt the REIT structure and trade publicly. Perhaps some of today’s multi-family residential REITS will venture in to single family as well?

What might result from these developments, once some real scale is achieved?

Perhaps there will be opportunities for nimble property management firms with solid regional coverage, assuming that property management is outsourced. Maybe real estate agents will also be outsourced (but forced to accept deep commission cuts, similar to how relocation companies operate).

But most importantly, housing prices could be positively affected as the market for foreclosures becomes much more efficient. Picture a reality show where homes instead of storage lockers are grabbed up and banks instead of storage companies are relieved of their non-performing asset burden. And as these properties are wrapped up within a REIT, we can then buy them with a $7 online stock trade via a click of a mouse…

Are you considering purchasing a North Shore home? It’s a buyer’s market, you should partner with a buyer’s brokerage that rebates commissions. We’re Exclusive Buyer Brokers LLC, Lake Forest.