Will the unprecedented surge in investor purchases of Single Family homes continue?
And what is the Risk to Housing Market
Just some initial thoughts …
Earlier I wrote about housing credit and delinquencies (neither are presently a concern). These are important topics but being overly focused on either is like fighting the last war (the housing bubble).
A new possible risk is all of the investor buying of single-family homes (including build-to-rent).
Housing economist Tom Lawler has been looking at the data of investor buying, for example, see Lawler: More on Investor Purchases of Residential Homes: Pretium and Lawler: More on the CoreLogic Home Investor Activity Report. Here is the recent CoreLogic report: Single-Family Investor Activity Remained High in the Third Quarter (Lawler suggested this topic).
Investor buying of condos and single-family homes made sense a decade ago when prices were far less expensive, and demographics were very favorable for renting. It was in 2010 that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive.
On demographics, in 2010, a large cohort had been moving into the 20- to 29-year-old age group (a key age group for renters). At the same time, a large number of homeowners lost their homes in foreclosure and had to rent. This made investor buying very attractive a decade ago: low prices and strong rental demand.
Now demographics are favorable for homebuying, and the concurrent pickup in demand for rental units is a bit of a mystery (see The Household Mystery). It appears we are seeing significant household formation with little population growth. And that would suggest the increase in household formation is not sustainable.
Free Money
Meanwhile large investors are able to obtain financing at very low rates.
Here is an interesting press release from November: KBRA Assigns Preliminary Ratings to Progress Residential 2021-SFR10
Progress 2021-SFR10 is a single-borrower, single-family rental (SFR) securitization that will be collateralized by a $823.5 million loan secured by first priority mortgages on 3,836 income-producing single-family homes. …
The aggregate BPO value of the underlying homes is $827.6 million, yielding an LTV of 99.5% … KBRA adjusted the BPOs, which yielded an aggregate value of $786.2 million. This represents a 5.0% haircut to the nominal BPO value. The resulting LTV based on KBRA’s adjusted BPO value was 104.7%.
That is a 105% LTV (loan-to-value) based on BPOs (Broker Price Opinions - not appraisals). With this kind of financing, investors are incentivized to buy at almost any price. The buyers of the security are counting on the cash flow from renting those 3,836 homes. But what if demand for rentals soften?
The Downside Risk
The size of the securitization market is relatively small - this isn’t a $10 Trillion mortgage market! So, even if there were defaults, there wouldn’t be a risk to the financial system.
However, if “free money” stops (perhaps because of higher interest rates), some of these deals would no longer make sense. And that might lead to a sharp decline in investor buying.
Currently, many investors still consider buy-to-rent as an attractive investment. Rick Palacios, Director of Research at John Burns Real Estate Consulting, tweeted this week:
It appears investor buying will continue for now. I’m still trying to piece this together, but if investors pull back, we will likely see an increase in inventory (something I watch closely).