Wall Street Betting Billions on Homes
Miami — Big investors are pouring unprecedented amounts of money into real estate hit hard by the housing crash, bringing those moribund markets back to life but raising the prospect of another Wall Street-fueled bubble that won’t be sustainable.
Drawn by the prospect of double-figure profit margins on rents and the resale of homes whose prices plummeted in the crash, hedge funds, Wall Street investors and other institutions are crowding out individual home buyers.
If the chain of easy credit and dangerous leverage that started on Wall Street fanned the housing bubble and eventual crash, some analysts find it disturbing that major investors are the ones snapping up the bargains — and eventual big profits — left in its wake.
“There is the possibility that Wall Street and the banks and the affluent 1 percent stand to gain the most from this,” said Jack McCabe, a real estate consultant based in Deerfield Beach, Fla. “Meanwhile, lower-income Americans will lose their opportunity for the American Dream of building wealth through owning a home.”
Real estate executives say institutional investors — who in some cases are bidding on hundreds of homes a day — account for as much as 70 percent of sales in some Florida markets. Over the past two years, analysts say, they also have accounted for a majority of purchases in other parts of the country where housing prices are rebounding sharply.
The influx of investors may explain why home prices have been rising in parts of the country most affected by the housing crash, despite high jobless rates and relatively few new mortgages being issued by lenders. In the past year, prices have risen 23 percent in the Phoenix area, 15 percent in Las Vegas, 9 percent in Tampa and 11 percent in Miami, according to the Case-Shiller home-price indexes. Nationally, prices are up more than 8 percent over the past year.
“I don’t know whether things are as good as they seem to be. A lot of properties are being occupied by institutional investors, not the end user,” said Scott Kranz, co-principal of Title Capital Management, a firm that helps big investors scout, buy and manage homes in Florida. “The end user would need to see a great increase in jobs, availability of mortgage money and a loosening of the reins that have been holding them back. But all the economic indicators are that we are not at that point.”
The ability of investors to make cash deals is helping them buy a large portion of the distressed homes that continue to flood the market. Property brokers and others in Florida say traditional buyers — even those able to qualify for financing in a still-tight mortgage market — are finding it difficult to compete with the cash and market savvy of large investors.
“The investors are making it hard for a regular homeowner to buy a property,” said Robert Russotto, a broker with Better Homes and Gardens Real Estate in Fort Lauderdale, Fla. “They are getting outbid by people with cash.” Russotto noted that out of the 20 home sale contracts he is the process of completing, 17 of the buyers are major investors.
Before the housing crash, big investors almost never wanted single-family homes, largely because of slow returns and the money-draining hassle of managing tenants in often far-flung properties.
But with prices still depressed and with low interest rates and high stock prices limiting prospective returns elsewhere, major investors see the prospect of healthy profits in single-family homes.
“Residential property is an on-fire asset class,” said Kranz, noting that his firm has plowed more than $100 million into residential real estate for investors in the past year and is on course to spend $250 million to buy an additional 2,000 homes in 2013.
At Title Capital Management, nearly four dozen analysts and lawyers are glued to computer monitors — some seven days a week — hunting for deals among the flood of foreclosures that have bedeviled this state.
Aided by its proprietary software, Title Capital sizes up each home for square footage, special features and the prices and rents they can command. The firm’s legal team then scrubs each property for liens and title problems before determining a price that would allow its clients on Wall Street and elsewhere to turn a tidy profit.
The company bids on about 200 houses a day, making it one of the largest players in Florida that help hedge funds and other Wall Street firms buy distressed properties. It is proving to be a lucrative niche.
Last year, famed investor Warren Buffett said on CNBC: “If I had a way of buying a couple hundred thousand single-family homes, I would load up on them. It’s a very attractive asset class now. I could buy them at distressed prices and find renters.”
A growing number of private-equity groups have done as much. Over the past year, Blackstone has amassed a portfolio of 20,000 rental homes worth $3 billion, spokesman Peter Rose said. American Homes 4 Rent, a firm run by warehousing magnate B. Wayne Hughes, has bought about 10,000 rental properties, according to news reports.
The strategy makes sense, as a shrinking share of Americans own their homes. After more than a decade of robust increases, the national homeownership rate peaked in 2004 at 69.2 percent. Since then, it has been in steady decline, falling to 65.4 percent at the end of 2012, according to Census Bureau figures.
The big investor activity is pushing up prices, which is good for the large number of homeowners whose mortgages are larger than their home’s values. But for people being shut out of the biggest bargains offered by the housing market, it means a longer, slower slog to building equity. It also raises the specter of future price declines when investors lose interest or decide to dump their properties.
“Clearly the investors are moving markets in some places,” said Dean Baker, co-director of the Center for Economic and Policy Research and author of a popular housing blog. “In some markets at the bottom end, you are looking at 30 or 40 percent gains year to year. That is frightening to me. At some point the music stops. The investors if they get hurt, that is their problem. But invariably a lot of other people will get caught up in that.”
But as things stand, many investors say the opportunities are growing, particularly in Florida. The data firm RealtyTrac reported this month that one in 104 properties in the state had received a foreclosure filing in the first three months of 2013, the highest rate in the nation. On top of that, nearly half of the homeowners with mortgages owe more than their houses are worth, which means many more foreclosures are on the way. Investors think foreclosures could surge for up to five more years.
Dallas Wharton, co-founder of Delavaco Residential Property Trust, a real estate investment firm in Fort Lauderdale, is ready. The firm, which is backed by Canadian investors, started out with 14 homes two years ago and now has 700. Meanwhile, Delavaco is preparing for a public offering on the Toronto Stock Exchange that Wharton hopes will raise as much as $40 million.
Wharton said his company is riding a lucrative wave. It is able to scoop up many homes for $60,000 or $70,000, which is just a fraction of the building costs. After making repairs, the company rents them out for as much as $1,700 a month. The firm’s biggest client is the federal Section 8 program, which subsidizes the rents of low-income tenants. Delavaco notes that Section 8 provides “over 60 percent” of the firm’s revenue.
“That’s a pretty good opportunity,” Wharton said, adding that investors help stabilize communities even as they make money. “If the end user does not have the ability to enter in the market, and they do down the road, have they missed an opportunity? Perhaps. But if it weren’t for investors, where would the market bottom be? What would happen to neighborhoods if homes were just to sit there and rot?”