Private Equity Taking Over the Housing Market

This doesn't seem like it should end well. Large amounts of institutional money coming into the housing market, pushing prices up. Blackstone is apparently getting into it in a big way.

Our bet right now is the scale of the opportunity is very big, and the pricing seems quite compelling," said Jonathan Gray, head of Blackstone's real estate group, at CNBC's Delivering Alpha conference in 2012.

A year later, the scale has become huge. So far Invitation has spent $4.5 billion, snapping up 25,000 distressed single-family homes in regions hardest hit by the financial crisis, and in those slowest to recover, the company said. Most of the homes are refurbished and then rented out by Invitation. The appeal of the rental market comes, in large part, from consumers trying in a variety of ways to avoid taking on new debt, said Invitation spokesman Eric Elder.

Personally, I think this is a pretty solid bet and frankly one of the better places to put your money. Besides, who doesn't want more CDO's backed by rental income! My question is how much this changes the structure of the housing market long term. It seems that this could eventually push out homebuyers, who can't qualify anyway, and possibly even push rents down as supply of rentals rises due to all the institutions looking to buy and rent. What say you guys?

I've always kind of operated under the assumption that housing would be stagnant because our generation is overlevered and under funded due to student loans, etc and aren't looking to buy a house anytime soon.

Comments (25)

9y
FrankD'anconia, what's your opinion? Comment below:

The institutional money obviously doesn't plan on owning these homes forever. I don't see how they're going to exit their positions without fucking up the market. That's 25k homes from Blackstone alone, let alone the other big players with the same strategy.

9y
NealCaffrey, what's your opinion? Comment below:
FrankD'anconia:

The institutional money obviously doesn't plan on owning these homes forever. I don't see how they're going to exit their positions without fucking up the market. That's 25k homes from Blackstone alone, let alone the other big players with the same strategy.

This was my first impression too but I think the market is just changing. This country has been fed the American Dream of owning your own home and building equity, which is unattainable for a large number of Americans given the current income gap. This is the market changing the rules of the game. I do agree though that this sucks for any people who invest in/rent/flip undervalued housing themselves. Pricing will probably force them out as well.

9y
samoanboy, what's your opinion? Comment below:
FrankD'anconia:

The institutional money obviously doesn't plan on owning these homes forever. I don't see how they're going to exit their positions without fucking up the market. That's 25k homes from Blackstone alone, let alone the other big players with the same strategy.

Those 25k homes obviously already exist, they are not increasing the supply of housing, but merely boosting the velocity of real estate sales.
9y
NealCaffrey, what's your opinion? Comment below:

This makes sense if they're getting good deals on those houses, which I assume they are through foreclosure auctions, but this is significantly more expensive than the apartment alternative. I mean there's separate maintenance for each place, larger land requirements, no shared walls/infrastructure.

Then again Blackstone has a shitload of cash and if they already have a lot of exposure to the apartment sector (not sure if they do) then this might be a smart way to diversify and reach a separate target demographic of couples with children and bad credit that have outgrown apartments. Ultimately they could end up offering renters an option buyout the houses when they have the financial means or just sell off the portfolio to a new single home REIT or something.

9y
mb666, what's your opinion? Comment below:

I think housing has another leg down. Prices remain above the historical trend in the Case-Shiller index. We're only in year 4 of the downturn after a 20 year housing bubble.

What's going to happen when interest rates inevitably rise? The Fed will eventually have to reduce liquidity to address inflation concerns. Housing will take a beating. REITs seem to have peaked.

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9y
waverider545, what's your opinion? Comment below:
mb666:
think housing has another leg down. Prices remain above the historical trend in the Case-Shiller index. We're only in year 4 of the downturn after a 20 year housing bubble.

What's going to happen when interest rates inevitably rise? The Fed will eventually have to reduce liquidity to address inflation concerns. Housing will take a beating. REITs seem to have peaked.

According to the Case-Shiller index the top-25 market composite peaked in April 2006.

Lets do the math together: 2013 minus 2006 equals 7 years.

9y
mb666, what's your opinion? Comment below:
waverider545:
mb666:

think housing has another leg down. Prices remain above the historical trend in the Case-Shiller index. We're only in year 4 of the downturn after a 20 year housing bubble.

What's going to happen when interest rates inevitably rise? The Fed will eventually have to reduce liquidity to address inflation concerns. Housing will take a beating. REITs seem to have peaked.

According to the Case-Shiller index the top-25 market composite peaked in April 2006.

Lets do the math together: 2013 minus 2006 equals 7 years.

I'm referring to when the equities market started to reverse in March 2009 S&P bottom @ 666).... not the high tick in the housing index.

9y
Pesca-pescatarian, what's your opinion? Comment below:

Read the title of this post, and I immediately want to move to Switzerland ..

Maximum effort.
9y
reallygranular, what's your opinion? Comment below:

There is an obvious, easy way out of the properties without screwing up the market. Many families do not currently have the capital for a downpayment now, but they should in several years. Blackstone can alter the terms for existing tenants into a "rent-to-own" structure or slowly feed the houses back into the market when housing demand is at normalized levels.

9y
Gene Parmesan, what's your opinion? Comment below:

Just talked about this last night. Cool idea, but wouldn't you have to wait for mortgage rates to increase for the margins to work?

Fill the unforgiving minute with 60 seconds of run. - Kipling
9y
reallygranular, what's your opinion? Comment below:
Gene Parmesan:

Just talked about this last night. Cool idea, but wouldn't you have to wait for mortgage rates to increase for the margins to work?

Higher mortgage rates make it easier for the math to work, but I imagine Blackstone has cheaper financing rates than the average household. There are plenty of structural changes you can use that would boost returns and not destroy the market. Hell, in the short term, they could sell all the properties to WFC instead of IPO'ing a REIT and let WFC cross sell a ton of retail banking products.
9y
..8277234, what's your opinion? Comment below:

Shiller wrote about this in the Times the other day, renting is becoming far more acceptable. The idea of having freedom and not being anchored by a mortgage is becoming more and more appealing. Also, you can't really say that the national housing market is being radically affected by institutional investors because they are only focusing in certain areas (Atlanta, Vegas, Phoenix, etc). You can look at those markets and say "yes that's overheated" but it's far different in markets without that institutional capital flooding in.

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9y
Blank999, what's your opinion? Comment below:

Rent. You can dial up or down your space needs, no maintenance, you live close to work, no issues at all. You lose your job and you can down size or relocate for work easily. Only asset you need is cash and investments. Owning a home is worth while if you rent the home and become a landlord. I'd buy condo's and have an agency take a skim and do the dirty work.

Mortgage interest destructibility needs to go away. No reason to subsidize individual decisions.

IMO, one of the main things keeping the house market going is institutional money. Lending standards are still very high and labor force participation, coupled with unemployment are still to high to have a true rebound.

You don't own shit until that mortgage is paid off. Home ownership is another spoon fed lie given to the populace. Be flexible and have your assets liquid.

  • 2
9y
FrankD'anconia, what's your opinion? Comment below:
TNA:

Mortgage interest destructibility needs to go away. No reason to subsidize individual decisions.

can't tell if freudian slip or done on purpose

9y
Gene Parmesan, what's your opinion? Comment below:

^Referring to reallygranular's "rent to own" concept

Fill the unforgiving minute with 60 seconds of run. - Kipling
9y
SaltySpitoon, what's your opinion? Comment below:

Blackstone and a partner of Tricon Capital Group bought over 5,000 homes last year, just in Florida.

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9y
Teddy Roosevelt, what's your opinion? Comment below:

Stepping aside from my current role...and looking at this objectively...does anyone feel like this is the hollowing out of America? Where ownership of real assets are being consolidated to a smaller and smaller group of people.

Please don't quote Patrick Bateman.

Best Response
9y
Blank999, what's your opinion? Comment below:
DBCooper:

Stepping aside from my current role...and looking at this objectively...does anyone feel like this is the hollowing out of America? Where ownership of real assets are being consolidated to a smaller and smaller group of people.

I get what you are saying, but is home ownership still really an asset?

1) Even with 20% down you don't own shit, the bank does 2) Homes have a cost (upkeep, maintenance, taxes) 3) Illiquid unless you are in a hot market (which has its own problems and costs) and if you aren't in a hot market you have to wait to get what you want for the house.

IMO, Americans continue to buy more and more shit and have bigger and bigger houses to support this. Home ownership was always this sacred "asset" because most people have nothing else. Buy a home, live in it, pay it off over 30 years and you have a nest egg.

The issue with this is that the world has changed. Jobs are no longer located in the suburbs. People would buy homes and then the factory would close or something and they couldn't find a job within 30 miles. So now they have this long commute which hurts the pocket book as energy prices rise. You are also inflexible.

So if you plan on buying a home, buy a condo in the city. You can rent it easier and you have more employment options. Public transportation also becomes feasible. You can break your lease and move if needed, adding flexibility which is important nowadays. You get a lower paying job and you can down size, you have kids and you can upsize.

I'd rather own assets that have a yield or ones that are liquid. If you are going to buy a house make sure you can put way more than 20% down and only do a 15 year mortgage.

  • 3
9y
Teddy Roosevelt, what's your opinion? Comment below:

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Please don't quote Patrick Bateman.

3mo
WalMartShopper, what's your opinion? Comment below:

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