Wall Street: Your New Landlord? PDF Print E-mail
Friday, 02 August 2013 20:37

A recent article in the LA Times explored a growing trend amongst large financial firms - namely, that of becoming active participants in the real estate industry by purchasing blocks of foreclosed properties with the intent of renting them out.  And although the comments section in the link above would have you reaching for the torches and pitchforks to raise against our banker overlords, the subtle ramifications of these actions are worthy of careful consideration from a macro perspective.

First and foremost, the most immediate effect of these purchases has been to remove distressed "shadow" inventory from the books of the traditional lenders and place them into the hands of institutions that wish to pay for the repair, rehabilitation, and management of these properties.  Beyond removing a significant source of downward pressure on the prices of homes in the communities in which these purchases have taken place, it puts into motion the creation of jobs and an expenditure of funds towards renewal and improvement in areas where these homes might otherwise have been languishing for months or years, blighting the streets on which they are located.  To the benefit of the institutions involved, it clears non-performing assets from the rolls of the selling parties, allowing them to refocus on new lending activity; for the purchasers, they are purchasing assets with significant room for upside growth, while at the same time regarding them as long-term investments with decent yields (rents).

From a logistical standpoint, it will be interesting to see how effectively these operations structure themselves in the management of multitudes of homes scattered across broad geographical areas.  Roofs will leak, HVAC systems will fail, tenants will be late with the rent... a lot of moving parts, and it requires boots on the ground rather than being correctable at a distance with the click of a mouse button.  Still, it's no different than what many property management companies across the country already deal with on a day-to-day basis, and with scale might come efficiencies.  In addition, Wall Street seems to heading back to a familiar well, discussing the securitization of the block rental income to be derived from these properties.  Provided the possibility of gradually increasing rents and underlying property values over the long-term, it could very well be a successful and attractive product to investors.

So far as the effects on the housing dynamic from the eyes of a prospective renter or buyer, the effects seem pretty clear: for the purchaser, in the immediate term this will create upward pressure on pricing (though again it does seem that the majority of homes bought up in this fashion were from inventory that had never actually "hit" the market).  For the renter, the additional rental inventory should put pressure on what landlords can charge, and hopefully result in some lower rents.  The temporarily "frozen" housing stock should be of benefit to builders as well, as they may be able to cater to those buyers looking to purchase in an otherwise inventory-constrained market.

Although some folks might react with revulsion towards Wall Street institutions benefiting from renting out homes to some of the same people they foreclosed on not long ago, when viewed in total isolation at least, it seems a positive for economic activity, blighted communities, housing prices, and lowering of rents in certain otherwise desirable areas.  For the DC market, however, this entire movement is essentially a non-factor due to the much lower volume of foreclosure/short activity and a competing community of individual investors/flippers.  By and large, it is those areas hardest hit by the housing crises that have seen such large-scale block purchases occur: Arizona, California, and Nevada.

Last Updated on Sunday, 04 August 2013 13:14
 

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