BY: ESTHER CHO
No doubt, the potential of the REO to rental market has caught the attention of both individual and institutional investors. But, what is the potential of the REO to rental market, and how long will it continue? In a recent report authored by economist Paul Diggle, Capital Economics addressed those questions.
So far, Capital Economics said those who seized the opportunity early on appear to have achieved gross rental yields between 8 percent and 12 percent, a sufficient amount to cover the price tag of managing single-family rentals.
The sufficient rental yields, however, will only last as long as there are enough discounted properties to purchase.
Recently, the National Association of Realtors reported pending home sales slipped month-over-month in August, noting shortages of lower priced inventory in much of the country, especially in the West.
While recent housing data points to a decrease in the supply of distressed inventory, Capital Economics said, “the potential supply of distressed homes is considerable,” noting an estimated 3.8 million homeowners who are either deeply delinquent or already in foreclosure.
In addition, there are about 375,000 REOs, but “the actual supply on the market has been dropping rapidly, particularly in the cities being targeted by investors,” Diggle wrote.
Prices are also rising.
RealtyTrac recently reported a 6 percent quarterly increase in the average price of foreclosure-related sales.
In Phoenix, where prices fell drastically and are now rapidly rising, Capital Economics said the three-month annualized increase in prices is currently at 25 percent, a rate that will lead to the market becoming overvalued in a little over a year.
Thus, with distressed inventory shrinking and prices rising, the research firm said, “Investors will not continue acquiring single-family homes beyond a few more years.”
Once interest in the REO to rental market wanes, the focus will be on two exit strategies – selling the property or spinning off the rental portfolio to a property manager, Capital Economics explained.
The research firm concluded the report by stating, “The bottom line is that small-scale, ‘Mom and Pop’ investors will continue to provide the bulk of the homes to the single-family rental market. Nevertheless, depending on how efficiently institutional investors can acquire single-family homes over the next few years, there is scope for them to make a significant contribution to the housing recovery.”
via Where the Single-Family Rental Market Is Heading: Capital Economics.
I’ve many buyers who are currently bemoaning the lack of inventory; we’re down to under six months in most of the inner East Bay. I also have REO insiders who tell me that we’ll see banks unloading properties this Spring. Which way is the market going to go? I suspect both: we will see declining inventory in the hottest areas – those with good access to transit and developing, walkable commercial zones; we’ll also see increased inventory and dropping prices in the further afield suburban areas.
One way to track investor sentiment on these matters it to watch the stocks of homebuilders. The Wall Street Journal just published this today:
By JUSTIN LAHART
For over five years now, people have been saying that home builders fortunes were about to turn a corner. And for over five years, that has been wrong.But it is beginning to look as if this will be the year when some housing bulls are actually right—with the caveat that, as always with real estate, location matters.
In 2011, only about 300,000 newly built homes were sold in the U.S., down from a peak of 1.3 million in 2005, and the fewest since records began in 1963. Builders also continued reining in new construction of single-family homes, and their volatile shares went nowhere. The Standard & Poors index of home-building stocks is within a percentage point of where it was a year ago.
Below the surface, however, there has been progress. With U.S. household formation picking up amid an improved economy, and with up to 300,000 homes falling to disaster and demolition each year, the housing glut that has been weighing on the new-home market is slowly being whittled away.
That doesnt mean there is no longer any excess housing inventory out there. But much of it remains, along with the “shadow inventory” of homes in foreclosure but not yet on the market, in busted bubble markets like Las Vegas. Most of the home builders have reduced their exposure to those areas M.D.C. Holdings is an exception, and stand to gain from improved markets in the many parts of the country where owning a home is looking increasingly attractive.
A Goldman Sachs model based on population, income, financing, construction costs and other factors shows that nationally, home prices are close to equilibrium. When Goldmans economists used their model to examine what is occurring at the local level, they found that in 94 of 147 metropolitan areas, prices are at least 5% undervalued. And in the case of the Memphis, Tenn., metropolitan area, 59% undervalued.
As a group, the home builders stocks look inexpensive—most are trading at about 1.5 times book value, according to FactSet data. But trying to figure out which one has the best geography is a challenge.
The builder in the safest spot geographically may be D.R. Horton, which, according to Deutsche Banks count, has its chips spread across 101 housing markets. That probably wont make it the one home builder that investors wished they owned in 2012, but it also isnt likely to be one they wish they had avoided. And it is a good proxy for those who believe in a housing comeback overall.
Toll Brothers, at 1.4 times book value, has well-established operations in the Northeast, where there is relatively little land available. But limited competition must be weighed against the fact that home prices in the Northeast look to be among the most overvalued.
Meritage Homes, at 1.6 times, still looks like the best pick. It does much of its business in Texas, where tighter lending regulations shielded the housing market from the bubble and bust and where the economy has been bolstered by the strength of the energy sector. The major caveat is that it wouldnt be wise to put it in any portfolio already chock full of oil stocks—a Texas hedge isnt something to bet the house on.
via HEARD ON THE STREET: Framing Out a Recovery for Home Builders – WSJ.com.
By Julie Schmit, USA TODAY
Short sales are increasing as a percentage of home sales in many states, helping some neighborhoods and homeowners avoid the more devastating impacts of foreclosures.
Short sales — when lenders allow financially strapped borrowers to sell homes for less than their unpaid mortgage — accounted for 12% of home sales nationwide in the second quarter. Thats up from 10% in the same period last year, says researcher RealtyTrac.
The increases were sharper in some states, including California, Nevada, Michigan, Georgia and Colorado, the data show.
In Colorado, short sales were 17% of all sales in the second quarter, up from 10% a year earlier. In California, they made up 25% of sales, vs. 18%.
Bank of America, the largest home mortgage servicer, expects to complete more than 100,000 short sales this year — more than double what it did in 2009, the bank says.
Wells Fargo Senior Vice President J.K. Huey says short sales have been “steady to slightly” up in recent months, partly because there are fewer bank-owned houses for sale in some markets, and that has forced buyers to pursue more short-sale properties.
Short-sale homes, which often remain occupied until sold, tend to retain values better than those that go through foreclosure. That helps values of neighboring homes.
In the second quarter, short-sale homes sold at a 21% discount to non-foreclosure homes, while bank-owned homes went at a 40% discount, RealtyTrac says. Short sales may also reduce losses for loan owners because they avoid full foreclosure costs. Borrowers may qualify for new mortgages sooner after a short sale than after a foreclosure.
“Short sales are a very positive solution,” says BofA Vice President Dave Sunlin.
Short sales peaked at 16% of the market in early 2009, RealtyTrac says. Realtors say there should be more short sales and that they should get done faster.
“We lose buyers constantly because short sales take too long,” says Beth Peerce, president of the California Association of Realtors. Short sales completed in the second quarter took 245 days, on average, RealtyTrac says. In a June survey, 77% of California Realtors called short sales difficult or extremely difficult; 15% said clients were foreclosed on while pursuing short sales.
Many short-sale efforts fail because homeowners arent eligible because they can still make payments, or purchase offers are too low, says Wells Fargos Huey. Loan owners may not agree on sale prices, either, she says. In most states, lenders can try to recoup short-sale losses from homeowners unless balances are forgiven. At BofA, Sunlin says balances are forgiven more than half the time.