CoreLogic, along with the Urban Institute, recently hosted a Capitol Hill panel event titled, “Cash Sales, Institutional Investors & Single Family Rentals: Performance, Pricing & Policy.” The panel featured candid discussion among participants from the non-profit and private sectors, exploring the economic, social and market impact created by the rise in institutional investors and the single-family rental business.
Moderated by Stuart Quinn, policy research and strategy analyst for CoreLogic, the discussion focused on the latest trends in cash sales and investor behavior, emerging challenges associated with the increase in wide-scale, scattered-site property management and the viability of the current institutional investment model. Panelists addressed the supply and demand of rental properties, as well as the current and future state of the single-family rental securitization market.
Offering a wide range of perspectives from within the industry, participants included Dr. Mark Fleming, chief economist for CoreLogic; Andrew Jakabovics, senior director for policy development and research for Enterprise Community Partners; Sarah Edelman, policy analyst for economic policy at the Center for American Progress; Oliver Chang, managing director of Sylvan Road Capital; Glen Costello, senior managing director at Kroll; and Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.
Key points shared by panelists included:
Dr. Mark Fleming, CoreLogic:
►While cash sales are down from their July 2011 high of 42.8 percent, they are still very high (at 38.4 percent) compared to the 2001-2007 average of 25 percent.
►Investors in general, whether institutional or “mom and pop,” are primarily concentrated on two types of assets: distressed (real estate owned and short sales) and existing homes, rather than new builds. For institutional investors in particular, or an investor who has purchased more than 10 properties in a year, distressed assets have been highly popular, though that supply is shrinking as foreclosure rates decline across the country.
►The institutional investor’s share of the market is small. It peaked at 7.3 percent in December 2012, and is currently sitting at 3.2 percent.
►Overall, housing dynamics are currently changing. Rental demand is rising while supply is dwindling, as a result of the declining share of distressed assets relative to all homes on the market. Due to this trend, rent prices will continue to climb.
Laurie Goodman, the Urban Institute:
►Cleanup from the foreclosure crisis; the number of homes that are seriously delinquent or in foreclosure is still elevated, and many of these current homeowners will become renters.
►An increasing share of new household formation is minority populations, who have lower homeownership rates, due in part to less family wealth and hence a lower capacity to make a down payment
►Student loan-debt overhang
►Stagnant wage growth
►Social attitude change towards homeownership (no longer a store of value).
►Even as the institutional investor share is dwindling, the transition from homeownership to rental is still occurring for the reasons above, which means more action for “mom and pop” in their local markets over the years ahead.
►As a back of the envelope calculation, institutional investors have raised $25 billion to purchase rental properties. The securitization market for single family rentals is $3 billion. We believe the securitization market has the potential of increasing, at best by $10-$15 billion dollars in the coming years.
►Recent growth in institutional investor financing of “mom and pop” investors raises questions about the possible scope of this financing. We think it is limited, as these institutional investors are not the most economic providers of this funding.
Andrew Jakabovics, Enterprise Community Partners:
►The housing crisis led to an increase in foreclosures and, in most cases, renters, not owner-occupiers, ended up moving into those foreclosed homes.
►Extended foreclosure timelines in judicial states resulted in a number of homes that required significant rehabilitation prior to being re-listed and remarketed for sale.
►Even with many vacant foreclosed homes, rental supply is still limited because there isn’t an efficient way to transition real estate owned properties into rentals.
Sarah Edelman, Center for American Progress:
►Institutional investors do not hold a lot of the national market share, but their properties are geographically concentrated, which can assist in stabilizing those areas if the properties are managed well.
►Successful “mom and pop” investors have experience dealing with the challenges of property management, but institutional investors are new to the single-family scatter site management business.
►Institutional investors are trying to build a long-term strategy, but they might decide large- scale dispersed management is too costly or too hard to manage. This needs to be studied further at local levels in order to better understand how to manage this type of a portfolio.
►Going forward, it is important to focus on helping first-time homebuyers and keeping existing families in homes.
Oliver Chang, Sylvan Road Capital:
►What institutional investor companies are doing is challenging because no one has ever tried amassing, renovating, and managing thousands of separate housing units.
►Because a 400-property portfolio can span a large geographic region unlike a 400-unit apartment building, logistics and maintenance are challenging. For example, a simple vacancy check is easy in an apartment building, but much more difficult across multiple jurisdictions.
►Maintenance is easier for “mom and pop” investors who have local ties to trusted plumbers, electricians, and contractors in their community, but it is more of a challenge for institutional investors to hire local services because they have little control over price escalation and quality of work. This is why institutional investor companies are starting to move to creating in-house services and management arms.
Glen Costello, Kroll:
►Single-family rentals differ from other mortgage-backed securities because an investor is concerned with a number of things: the overall market value of the property, that the property serves as a reliable performing asset via rental income and that the amount of value is sufficient so a property can return to investors if it’s sold.
►This dual-focus creates a more hybrid price dynamic which shares some commercial mortgage backed security (CMBS) and residential mortgage backed securities (RMBS) attributes.
►Given the lack of history of this asset class, the rating process ensured that there were adequate investor protections, including the recording of a mortgage for each property and conservative assumptions including less than 50 percent of value recovery of distressed sales.
At the conclusion, Dr. Fleming pointed out that the rise of institutional investors and the single-family rental business is a positive thing overall. “This process is part of a dynamic picture of rehabilitating existing home stock that would otherwise be sitting unused, which is good, because we’re not building a lot of new homes right now,” he said. “It may be causing shifts in competition in the short run, but it’s playing an important role in the market recovery as a whole.”