Housing investors pick up market slack
Invitation Homes bought one of its first fixer-uppers in the San Fernando Valley just last May, a three-bedroom steps from a sought-after school in Los Angeles' North Granada Hills neighborhood.
More than 200 homes later, the company's Dodger Blue "for rent" signs are a fixture in the Valley — markers for a massive Wall Street wager on the housing recovery.
Created last year by private equity titan Blackstone Group, Invitation Homes has spent about $3.5 billion buying 20,000 houses in nine U.S. markets. It's a new business model emerging from the misery of the mortgage meltdown.
Blackstone and a handful of other firms believe prices fell too far in the hardest-hit markets. So they're racing to buy up the bargains, rent them for short-term profit and hold them for long-term price appreciation. These firms say they've invented a new investment that also serves the public good by fueling the housing recovery and sprucing up homes.
The company is creating jobs and providing quality homes for families, said Mark Beisswanger, Invitation Homes chief operating officer.
"We feel good about being able to fix up what is generally one of the worst houses on the street," he said.
But some experts challenge the business model, and critics call it profiteering at the expense of neighborhoods and families who want to buy the same affordable homes. John Husing, an economist who studies California's hard-hit Inland Empire region, sees irony in Wall Street buying up Main Street.
"They create the problem — and now they are taking advantage of the problem," Husing said.
In all, major investors have raised between $6 billion and $9 billion to buy single-family homes, according to a recent analysis by investment bank Keefe Bruyette and Woods. The goal is to bring corporate scale and efficiency to what has historically been a mom-and-pop, single-family-home rental business.
These firms are also exploring ways of packaging rental income streams into securities, similar to the way mortgages were bundled during the boom years. Those mortgage bonds — often packed with risky home loans that produced mass defaults — turned into the toxic assets that helped bring down major banks during the financial crisis.
The Blackstone shopping spree has extended into several parts of California, Atlanta, Phoenix, Charlotte, Seattle, Las Vegas, Chicago and multiple cities in Florida. According to property records tracked by the real estate firm DataQuick, the company has swarmed some neighborhoods once ravaged by foreclosed homes. In a single ZIP code in the Inland Empire, Fontana's 92336, the firm has bought 74 homes in less than a year.
The investors have played a major role in recent home-price surges. In the process, financial firms — including Oaktree Capital Management, Colony Capital and the Alaska Permanent Fund (which manages that state's investments) — are rapidly staking claims as the new landlords of the suburbs.
On paper, the buy-and-hold calculus makes sense. The foreclosure crisis destroyed home values — but drove up rents, as repossessions created a new wave of rental demand from would-be owners with ruined credit. Fresh demand from young workers, a short supply of newly built rental units, and stricter mortgage requirements have also made the rental market competitive.
Last year, the Federal Reserve advocated renting out foreclosed homes as a strategy for banks to limit losses. Government-controlled mortgage giant Fannie Mae initiated a pilot program selling foreclosed homes in bulk, raising investors' hopes of buying at discounts from big institutions.
But the jury is out as to whether the smartest guys in the room can create prominent national brands in a historically labor-intensive, low-margin business. An acute inventory shortage — particularly in Western markets, where demand for cheap homes is so high — has made the acquisition of houses increasingly competitive.
"If the prices move ahead too fast — before you have a big enough portfolio — the opportunity could disappear," said Jade J. Rahmani, the lead KBW analyst on the industry report.
That sense of urgency has led some firms to begin buying regular homes alongside bank-owned properties, competing with everyday home buyers and small-time home flippers who renovate properties to sell.