Updated almost 12 years ago on . Most recent reply
Is the REO/Rental market about to collapse?
The primary, if not only, reason there has been a brief spike in subsidized demand for housing in recent months (2012), has been the GSE/FHFA endorsed REO-To-Rental plan, and associated securitization conduits, in which large asset managers have been encouraged to take advantage of government funded, risk-free financing (and entirely bypassing banks who have given up on loan origination due to legacy liability issues which have every bank tied up in litigation from now until Feddom come - just see today's Bank of America results) and purchase foreclosed properties in bulk, with the intention of converting them into rental properties.
http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.
http://www.zerohedge.com/news/2013-05-16/multifamily-starts-suffer-biggest-monthly-plunge-2006-reo-rent-recovery-dead
In addition to the money-laundering aspect (confirmed previously) and the REO-To-Rent scramble by PE firms and hedge funds (which is now over as PE become active sellers of apartment rental properties), we highlighted the third implicit subsidy to the housing non-recovery:Foreclosure stuffing. We explained this scheme by banks to limit the amount of available for sale inventory as follows: "since the properties not entering the foreclosure pipeline are effectively kept out of inventory, even shadow inventory, and thus the distressed end market, the monthly drop in foreclosures has acted as a form of subsidy to the housing market, as month after month less inventory than otherwise should, enters the market.... What this has resulted in is a logical increase in prices of the properties that are on the market." Today, the mainstream has finally caught on, and courtesy of RealtyTrac has come up with its own name for this subsidy: Vampire REOs.
Sorry for the length, but would it be frivolous to invest in rentals or REO's seeing as this bubble's about to pop?
Is there a way to mitigate the risks whether its buying and holding or flipping?
Hoping @JonHoldman, @JScott, @BenLeybovich, and @BrianGibbons responds to this thread.
Most Popular Reply
@Justin B. -I was going to write a reply going into all sorts of details, but the more I thought about what I'd be writing, it would end up being more like a short book than a forum reply, so I'm going to try a different approach, which I hope still makes sense.
You can read articles like these (and I did read your links, I'm not just dismissing them) until you are blue in the face and still not have a solid conclusion, you'll just have a blue face! I can look back to 2007/2008 and now with the benefit of hindsight (which is of course always 20/20!) it seems so hard to believe that anyone didn't see the real estate correction or crash coming like a speeding freight train! Prices kept going up, up, up and up and we were building new houses and condos all over the place, many built to sell mostly to speculators, not people who were actually going to live there and on top of all of that, much of it was being paid for by these INSANE mortgages where someone with rotten credit could just claim they made whatever amount of income and/or owned whatever amount of assets, didn't even have to show any proof of it and would walk out with a mortgage, assuming of course they'd pay a higher interest rate! (thus making default even MORE likely!) I mean, how could ANYONE with half of a brain not have seen that crash coming, especially these pundits and predictors that write articles like these??!! Yet, only a few of them really called it out before it happened!
Whether its real estate or stocks or commodities or whatever, you can always find the doom and gloom guys and the endless sunshine guys as well. I prefer to focus on the individual investments and make my decisions that way.