Was looking at some data from Zillow that indicates about 17% of US homes with a mortgage remain under water:
Bad enough but the reality is that a much larger portion are effectively frozen in their homes: They can’t sell and net enough money to make the downpayment on a similar size home, forget about actually moving up:
Tom Barrack over at Colony Capital put up a nice presentation of where he sees the opportunities for real estate investment in the current market. While Colony is geared to serving their large institutional investors, those of us operating on a smaller scale can benefit from Tom’s insights as well.
My Exec Sum of the opportunities he sees that I think will impact smaller investors in North America (and my comments in parentheses):
Commercial and residential real estate are great investments today because equities and debt are mispriced and the economy is regaining its feet. (There will be competition however).
Distressed debt in the US is diminishing but they are continuing to resolve non-performing assets (which can create deals for long term holders as these turned around assets come back to the market).
Single family residential for rent housing is stabilizing and becoming a institutional asset class (which can provide exits for those who have built portfolios of these properties).
Mezzanine debt and what he calls ‘stretched senior debt’ is becoming more available for value add & opportunistic deals because institutional investors such as pension funds need the extra yield (it will be easier to finance turnaround commercial properties at higher LTVs).
Tom Barrack was on CNBC last week to talk about real estate with the traders. Great TB quote to open the show: “It’s always great to be the slowest guy on Fast Money”. There’s more wisdom in that statement than any of the show’s regulars understood.
A couple bullet points but definitely worth watching the video. The link on the image below goes to the Colony website where they edited the three segments together (commercial free too):
Housing [of all types] is the best opportunity. Today there might be a Fed bubble but there isn’t a housing bubble.
The rise in interest rates while not big and still low historically speaking, will hit entry level housing. 100bp (basis point, where 100bp = 1%) rise in interest rates will cost a borrower an extra $150+/- a month on their mortgage payment for a $200,000 home. That will keep more people renting.
According to the ASU W.P. Carey School of Business’ Phoenix Housing Market Explained presentation, PHX will have to add housing equal to the current size of the Denver metro area over the next two or three decades to hold all the people who will move there. This presentation was done in March of this year but the demographics are powerful and still operating. Watch minutes 5 to 25 for the market demographics, after that they dive into the specifics of the single family sector recovery.
Aaron Task speaking on Yahoo Finance’s Daily Ticker show says that: “Owning apartment buildings and renting them out is a great business.” He’s not as sure about the single family REO to Rentals (RtR) model though. Click the image below to view the video, at about 1:44 in he’s talking about apartment building investment:
Scott Bassin, EVP and head of multifamily for PNC Real Estate says single family rentals will only marginally impact apartment building investment because there is a certain group of people who want or need single family homes, and everyone else. See his comments in the Globe St. video from the NMHC Apartment Strategies Conference in Palm Springs.
The Fiscal Times had a piece the other day reviving the good old rent vs. buy meme. The new angle was that Zillow has updated its method for comparing the costs of renting and the costs of buying and uses it to produce what it calls a ‘Breakeven Horizon.’ Besides sounding vaguely like the title of an old sci-fi movie, beyond the breakeven horizon is where buying a home makes more sense than renting and in theory the less time to the horizon, the more the market is tilted towards buying.
Now I have to admit I was intrigued with the thought that Zillow had re-examined their methodology because as I have written about earlier, their previous calculation ignored the real costs of maintenance, repairs and saving up for replacing big expensive things like the roof, the furnace and the driveway and that is a pretty big chunk of money over time. Industry figures for repairs and maintenance on single family housing run from one to three percent of the home value. Have a look at the chart* below to see how much a relatively modest 1.5% adds up to over time.
Tom Barrack of Colony Capital on what’s really happening in US real estate from an investor’s perspective. The clearest, most cogent look at the state of commercial, multifamily and single family markets today and where the opportunities are. The first five and a half minutes is about Europe and the bottom line there is don’t but after that it is all gold. If Tom wanted to be one of those real estate ‘gurus’ he could package this video with a big notebook and some advertising and sell it for $10,000- and it would be better than any of the other stuff out there. And you get it for free. I’ve watched three times and get an extra little nugget each time.
Colony Capital has big plans for the REO-to-Rentals (RtR) sector. Not only do they want to buy 30,000 plus houses to rent them out, they also want to turn RtR into an institutional grade asset class. That has big implications for single family real estate investors who will now have deep pocketed competition that enjoys economies of scale.
In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.
One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.
While they do acknowledge the challenge of REOs-to-Rentals:
However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.
… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-