The housing market continues to display signs of slowly shedding its recent bad reputation and is actually gaining real recovery traction. Prices in many areas are firming up and even rising, listing inventories are shrinking, permits for new homes show improvement and mortgage money is still quite affordable, so long as the applicant manages to qualify under today’s rigorous underwriting guidelines.
Life seems to be good in the real estate business. And predictably getting better.
At least that’s what large investors like equity shops and hedge funds, among them Blackstone Group, Apollo Global Management and Colony Capital, firmly believe. They are now moving in aggressively to purchase REO – real estate owned - single-family houses in bulk in states such as Arizona, California, Florida and Nevada, the original four who were mauled rather severely when the infamous housing bubble let out all its hyped-up air. The recipe is simple. Acquire homes – hundreds and often thousands of them - on the cheap, turn them around, rent them out and according to their secret formula sell them later for a handsome gain. Billions have been and will be spent on this particular scenario. The pace is actually accelerating as the market metrics keep perking up.
It certainly will help banks and the likes of Fannie Mae and Freddie Mac to move foreclosed inventory from their books and refresh their balance sheets. Vacant and frequently tarnished REOs will be renovated and eventually occupied with tenants to stop potential further deterioration of the housing stock and also give affected neighborhoods a welcome lift, likely beginning to stabilize any value imbalances.
On the other hand, existing homeowners may have mixed feelings about a house four doors down being sold for, say, $200K less than what they paid for theirs. True, it has been fixed inside and out and will get occupants, but it still hurts. How long does it take for the real estate market to relieve them from their chilling underwater status? Are they reasonable candidates for a mortgage walkout? Possibly so. Besides, tenants generally spend less time and money in property upkeep than owner-occupants, so the price stability prediction may be longer than expected in coming.
It appears there is an actual investor rush on now to get in on the gravy train to acquire attractive housing assets with rosy future returns. It could well lead into another bubble as more and more institutional funds chase an apparently shrinking inventory. In fact, buying today may already be too late in several regions where values have gone up at least partly due to the demand generated by these bulk purchasers and the rent won’t be able to cover their mortgage and other costs.
Then what? The acquisitions come to a halt. The nascent housing upturn could well face a new no-growth period. Deep down this process somehow looks like an artificial remedy with little long-term foresight. A strong and sustainable real estate market is built on owner-occupied homes, some might argue. There certainly is some truth to that.