Editor’s Note: this article is excerpted from the February 2013 issue of RealtyTrac’s award-winning newsletter, the Foreclosure News Report.
The most significant innovation to hit the residential real estate in decades occurred in 2012. A first single family REIT (real estate investment trust) went public. For the first time in history, everyday people can own shares of the American Housing Market, $20 at a time. Not since the creation of the 30-year fixed mortgage did so much capital flow into the single family market as will flow into it in the next 10 years, via single family REITs.
It can be said that all innovation begins with something that is missing. Something that should exist in the world but doesn’t. Then some people recognize that void and fill it. Single Family REITs (“SFRs”) are just such an innovation. Silver Bay Realty Trust broke the seal last year and many more will follow.
The implications could be incredible, including adding a new dimension to the concept of homeownership. Follow me on this.
When millions of people can invest $100 a week in the single family housing market through their retirement accounts and financial planners, a permanent wave of capital will flow into US housing. As a result, a trillion dollars will be allocated, one retirement account at a time, from mutual funds and commercial REITs into SFRs.
These REITs and their shareholders are a new class of homeowner.
Consider this scenario — a family rents a great house they love on a street they love, amongst neighbors they are fond of in a school district they are committed to. They settle in and stay there a long time. But, like everyone in America, they have a hankering to be homeowners. So what if they get their homeownership fix from buying shares in the REIT that owns the house they live in?
Are they homeowners? I say yes!
I believe that family will have pride in ownership. They will respect the home and take care of it. They will allow themselves to put down roots and stay for a long time. They will not be “throwing money away” as many proponents of traditional homeownership would put it. They will pay their lease, let the REIT cover the repairs and maintenance costs, and stow money into the portfolio one share at a time.
Some have expressed concern over how this level of institutional attention could negatively impact the housing market, and they are right to be concerned. If recent history is any guide, institutions running amuck in the housing market only produce bad outcomes for everyone involved. They trample on the proverbial garden, and then move on to trample on another when their hungers are satisfied.
I personally share this concern over the breed of investors who approach single family investing as a trade instead of as a business. Traders buy low and sell high. They sometimes ignore fundaments and are seduced by opportunities that, due to timing and circumstance, offer deep perceived discounts. Then they wait for timing and circumstance to change in their favor, and sell.
One more concern that warrants a response – “investors are driving prices up on first time buyers and making homeownership harder for them to achieve.”
True, competition for houses will drive prices up, but I believe that’s the way we want it. Gradually escalating home values are normal, so long as population continues to gradually escalate. It’s when home prices go down that all hell breaks loose.
Single Family REITs provide a path to homeownership to everyone with a minimum down payment of one share. In this way, it is lowering the barrier to homeownership — to $20.
Read the full article in the February 2013 issue of Foreclosure News Report. If you subscribe before March 15 you'll receive the February issue free!
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