Big funds on Wall Street have recently been buying lots and lots of real estate, apparently taking the advice of Warren Buffett. It was Buffett who told CNBC in 2012 that given chance to purchase several hundred thousand single-family homes he would “load up on them and I would — I would take mortgages out at very, very low rates.”
The purchase of thousands of single-family homes by major players on Wall Street is part of the buy-to-rent or “BTR” market. Six major firms are identified with such purchases and they have already bought nearly 78,000 units, according to a new report from Morgan Stanley entitled “The New Age of Buy-To-Rent Institutions Are Here To Stay.”
As significantly, the report also says that while the size of the current BTR market is $17 billion it could grow to more than $100 billion during the next few years.
The numbers and the mere involvement of Wall Street firms has created a number of concerns that can be found across the Internet. In this particular situation, however, the drive for real estate profits may actually have a social good.
Let's start with some numbers: Morgan Stanley says the big six own 77,700 properties. The players involved include Blackstone Invitation Homes (30,000 units), American Homes for Rent (16,000), Colony American Homes (12,800), JP Morgan (5,000), Waypoint (4,600), Silver Bay (5,500) and American Residential (3,800).
This seems like a lot of properties but nationwide it’s not a big deal: For instance the National Association of Realtors says that existing home sales are now running at more than 5 million units per year. If it happens that the BTR market gets six times bigger, as Morgan Stanley predicts, it will still amount to just 7 percent or so of the current marketplace and perhaps less in a future with more home sales.
On a local basis, however, the impact could be more profound if there is a buying concentration. However, where is the example of a private real estate monopoly? If prices get too high people just go elsewhere, investors flee and the would-be monopolist gets stuck with lots of bricks and maintenance.
The typical existing home in July sold for $213,500 says NAR. In contrast, the BTR business absorbed 77,700 units for $11.742 billion. That's an average of $151,120.
The reason for the low prices is that the BTR firms are buying foreclosed property at discount and in bulk, plus they’ve been buying in major foreclosure centers such as Las Vegas, southern California and Phoenix. Because of rising prices in these areas, says Morgan Stanley, one can expect that BTR activity will now expand into southern Florida, the Midwest and Northeast.
What’s really going on is that the inventory of distressed homes is being reduced. This is extremely good news because when foreclosures, short sales and REOs appear in comps they push down local home values. Getting these homes sold, refurbished and off the market helps everyone who would prefer to see rising home prices.
Rather than sell of their properties like a typical investor or homeowner, one strategy for Wall Street could be to bundle the homes together and raise cash through the sale of securities backed with rental income and real estate equity. Alternatively, the BTR companies could simply hold onto their properties and hopefully enjoy rising rental incomes. Once a track record is established a package of such properties can then be compared with 10-year bonds for pricing purposes.
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