U.S. housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. However, this recovery is different, note industry executives and analysts, as investors, including some big Wall Street players, are leading the way. Nick Timiraos expounds more on this trend in his article for The Wall Street Journal.
LAKE FOREST, Calif.—Jeff Pintar had buyer's remorse as he purchased 12 foreclosed homes in five Southern California counties on a single day. His regret: that he didn't buy more homes a year earlier.
"Things have turned around faster than anyone anticipated," said Mr. Pintar, who first began buying properties here four years ago and now owns or manages 1,700 homes, which he rents out for between $1,000 and $3,800 a month. Here in Orange County, nearly every home listed for less than $400,000 "is being pursued by institutional investor capital," he said.
U.S. housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. This recovery is different. Investors—including some big Wall Street players—are leading the way, say industry executives and analysts. Their role is noteworthy given that flippers and speculators were blamed for helping to inflate the housing bubble of the past decade.
Today's investors are mostly buying with the intention of holding on to the homes and renting them out. As they pile into the housing market, they have set off a chain reaction that has stabilized prices and changed market psychology, industry executives and analysts say. Fear of buying homes when prices are dropping has been replaced by the fear of missing out on cheap homes.
"Whether they knew it or not, investors helped set a floor. They warmed up the market, and it brought buyers back," said Lanny Baker, chief executive of real-estate brokerage ZipRealty.
Investors have always played a role in the housing market, but their presence was often small. Currently, cash buyers—largely investors—make up about 32% of sales nationally, according to the National Association of Realtors. In Southern California, a favorite target for investors, absentee buyers accounted for 31.4% of purchases last month, up from an average of less than 17% between 2000 and 2010, according to DataQuick MDA, a real-estate research firm.
While some firms have focused only on Sunbelt markets with newer housing stock, others are branching out. American Residential Properties Inc., which began amassing hundreds of homes in Phoenix four years ago, earlier this month bought 93 homes in Chicago's southern suburbs, bringing its total there to around 300. On Friday, the company said it planned to raise $300 million in an initial public offering, according to a regulatory filing.
The rush of investors into the housing market follows a long push by federal policy makers to foster the American dream of homeownership that unraveled for some people in the housing crash. The homeownership rate fell to around 65% last year from 69% in 2005. "We're clearly at the beginning of a rental boom," says Christopher Thornberg of Beacon Economics. "We all saw there had to be a shift towards renting single-family units that owners could no longer afford. Investors played a critical role in that transformation."
Their arrival will further transform some communities already hit hard by foreclosures and falling home prices. Renters have less of a stake than do homeowners. But deep-pocketed investors can still be good news for neighborhoods that otherwise would be at risk because so many homes had been neglected.
Where investors are scooping up homes, "you're no longer seeing shabby homes that have grass growing up to the doorknob," said Ivy Zelman, who owns a real-estate advisory firm.
The house-rental market long has been dominated by mom-and-pop outfits, including retirees, real-estate brokers, doctors and other professionals, and they still account for most investor purchases. Over the past year, large private-equity firms such as Blackstone Group BX -2.02% and Colony Capital have spent billions of dollars buying up single-family homes. Blackstone says it has purchased 20,000 homes since early last year. It is buying more than $100 million worth of homes a week and has spent $3.5 billion so far.
Executives in these companies say the rental market for single-family homes is fertile turf because home prices are relatively low and rental rates are healthy. They expect the number of families locked out of homeownership—because they don't have strong enough credit or savings to qualify for a mortgage—will continue to grow.
Around 12% of all U.S. households—more than 14 million people—rented a single-family home in 2011, up from 9% in 2004, according to the most recent U.S. Census figures. Three-fifths of people who lost their homes to foreclosure in the past five years ended up renting a house, said Ms. Zelman.
"It's a very attractive time to buy a home if you can," said Justin Chang, president of Colony American Homes, a subsidiary of Colony Capital. That has created "a big opportunity to rent homes to people who for whatever reason have chosen not to buy or can't buy." Colony has spent more than $1 billion on 8,000 homes in seven states, and Mr. Chang said it isn't through buying. "In each of the markets we're in, we think we can go deeper," he said.
Investors are concentrating on markets that have cheap housing and where job growth—and rental demand—is revving up. A year ago, Phoenix became the hottest target, and with prices there up by 20% since early last year, investors have raced to find similar discounts in other metro areas. Silver Bay Realty Trust Corp., SBY -2.17% which last year became the first publicly traded home rental firm, owned some 3,400 homes in 10 different markets from Phoenix to Atlanta to Tampa, Fla., at the end of 2012.
Housing is also attractive to startup investors. Srini Nallapareddy purchased a home for his family in Orange County's Lake Forest four years ago and is looking to buy a second home in the same area. He plans to hold on to one as a rental and live in the other. "Right now, it just seems like real estate is a good place to put cash," said the 40-year-old software engineer.
Other factors have contributed to the emerging housing rebound. An improving economy and low mortgage rates have stimulated demand among traditional buyers. But these new buyers are finding shortages of homes for sale in many parts of the country.
High maintenance costs traditionally had kept investors out of managing hundreds of scattered-site rentals. But investors set about overcoming those hurdles two years ago because low interest rates engineered by the Federal Reserve generated "a tremendous appetite for yield," said real-estate consultant John Burns, who advises investor firms. "It really sent capital chasing to figure out this business."
Investors have concentrated their homes in particular neighborhoods, while using technology that allows them to manage homes by collecting rent and handling property-maintenance requests online.
Not everyone believes that the current level of investor activity is healthy. Some worry that investors will eventually flee the housing market if values erode again or if the expense of maintaining a large number of homes becomes onerous. "Are they going to continue to maintain them? Or are they going to dump them into the single-family market?" said Mr. Thornberg of Beacon Economics.
Some investors have a notorious history in the housing market. During California's housing bust in the late 1980s and early 1990s, the federal government sold hundreds of homes in California's San Bernardino and Riverside counties, about an hour east of Los Angeles. Some homes weren't maintained, turning entire neighborhoods into shabby rental communities.
Colony's Mr. Chang said sophisticated real estate professionals are unlikely to repeat such practices. "If you're building the business for the long term, which we are, the incentive is to make sure the assets are looking good," he said. "If you let them go, tenants will leave."
While investor interest in housing has helped stem big declines in household wealth, their ubiquitous presence is a growing problem for individuals who are finding themselves on the losing ends of bidding wars.
"We can't find anything because investors are gobbling up everything that is affordable," said Gloria Wain, 66, of Costa Mesa, Calif., during a morning meeting with her real-estate agent. After losing out to 18 offers—mostly cash offers from investors, according to her agent—she decided to raise cash herself in an effort to compete. She plans to borrow money from her son.
In Orange County, investor purchases accounted for around 22% of home sales last year, up from 11% in 2007, according to Mr. Burns, the consultant. Fewer than 3,300 homes were listed for sale last month, down from 7,200 one year ago and more than 10,600 two years ago. The decreased supply has pushed prices up by nearly 10%.
For Mr. Pintar, the competition from other investors means he has to change his tactics. Last year, Mr. Pintar's company mainly purchased foreclosed properties individually at courthouse auctions, known as trustee sales, before the homes were repossessed by banks and listed for resale. He buys both for his own portfolio and for institutional investors, including Colony.
In 2008, fewer than 10% of foreclosures went to investors at courthouse auctions in Orange County.
But last year, investors bought nearly half of foreclosures at such trustee sales, according to data maintained by ForeclosureRadar.com, a research firm.
That has sent Mr. Pintar searching for deals through traditional real estate listings, especially short sales, where homeowners who owe more than their property is worth get the bank to agree to sell the property at a loss. Investors can have an edge here over homeowners, who often need to move into the house by a certain date, because short sales often take a long time to complete. About a third of his purchases these days are short sales.
From a pair of second-story office suites off Pacific Coast Highway in Dana Point, Calif., a team of buyers at Pintar Investment arrives at 6:30 every morning to prepare for the auction sales. They analyze 1,000 properties every week, arrayed behind pods of computer screens that look like a Wall Street trading floor. A poster hangs on one wall that reads, "Invest Like a Champion Today."
Some of Mr. Pintar's investors have him steer clear of certain homes, such as those with swimming pools, which require extra maintenance that isn't covered by higher rent. Mr. Pintar focuses on neighborhoods that have low crime and good schools and are near freeways and shopping areas.
Once they have got their shopping list, "it's a conveyor-belt machine that goes into motion," said Mr. Pintar. Field inspectors visit the homes, interview the owners and assess repair needs. A separate team combs tax and title records to make sure there aren't additional liens, which the new owner would have to pay off. Purchased homes get fresh paint, carpet, appliances, fixtures, and granite countertops. Skimping on repairs only leads to higher expenses later, said Mr. Pintar, who owns a separate property-management company.
He founded his firm four years ago. At first, he focused on buying rentals in California's inland counties—San Bernardino and Riverside—where there were more foreclosures and lower prices. But as competition there has heated up, yields—or the amount of rent a property fetches divided by its selling price—have fallen. He is willing to accept lower yields in more expensive coastal markets that have better prospects for price appreciation.
Mr. Pintar dismisses the concerns raised by critics about investor-owned housing. "Let's face it: The banks weren't putting any money into them after foreclosure, and an owner that is not making his payments is not taking care of the house," he said. "These homes are now cleaned up with people living in them."
He pulled his Mercedes-Benz up to the curb during a recent visit to a peach-colored three-bedroom on Belgreen Place in Lake Forest that his company bought for $375,000 and plans to rent for $2,600 a month. The drapes were drawn and weeds grew around a child's plastic slide on the front lawn. "This one looks like it's going to need a lot of repairs," he said. Mr. Pintar pointed out a tidy dark-green home with white trim and a neat lawn across the street. "When we're done, we want it to look like that," he said.
Mr. Pintar said he has no plans to slow down. In the past four months, the professional landlord hired 75 new employees. He also looked into buying his own commercial office building for his growing operation, he said. "We figured why pay rent to someone if you don't have to?"
Jeff Rutt is the founder of Keystone Custom Homes, a leading independent home builder in Pennsylvania. Subscribe to this Facebook page for U.S. housing updates.
