If you’ve been paying attention to news surrounding the ongoing foreclosure crisis you’re probably aware that investors are starting to scoop up large numbers of foreclosed single-family homes in order to convert them into rental units. Smaller homes are being rented as-is while larger ones are being subdivided into individual apartments. This is to be expected with home prices being the lowest they’ve been in a decade. Yet there is something new happening in the rental market that very few saw coming: hedge funds joining property managers to get their piece of the rental pie.
Blogger Robbie Whelan wrote on this very topic in a piece published by the Wall Street Journal on April 24, 2012. This very insightful blog gives us a glimpse into what traditional securities investors are looking for in the real estate market. Needless to say, if current trends continue there’s a real possibility that we could continue seeing individual home ownership rates decline.
“Since the foreclosure crisis took hold, flooding the market with millions of cheap homes,” Whelan writes, “hedge funds have been mining the distressed market for rental opportunities, teaming up with local property managers to buy thousands of foreclosed homes at courthouse auctions and more recently, from Fannie Mae, with the hope of generating double-digit investment returns.”
The column goes on to further explain that hedge funds and other like-minded investors have traditionally stayed away from the residential rental market where it pertains to single-family homes. Though such investors have long been fans of high-rises and larger apartment buildings with dozens of units, single-family homes have been avoided because they require a larger staff and budget to maintain them. Seeing the type of return investors are after usually isn’t possible with single-family homes.
According to Whalen, however, the rock-bottom prices of today’s market appear to be a bigger temptation than traditional investors can resist. Whelan claims that “prices have fallen low enough that investors are willing to take the plunge and deal with the headaches of backed-up toilets or rotting roof tiles in exchange for investment returns that beat Treasury yields by a long shot.”
The Natural Market Correction
If you’re an investor of any type this is news that should be positive because it illustrates the effectiveness of the market naturally correcting itself. The market got largely out of whack beginning with the 1970s construction boom as more and more people began equating the “American dream” with home ownership. The federal government took up that mantra under the Carter administration and has not looked back since. And while homeownership for every American family seemed like a great ideal for the Great Society, one thing the markets will not tolerate forever is artificial inflation. The housing crash was inevitable; it was only a matter of timing.
It may well turn out that single-family homes are not the best investment for hedge funds. If so, they’ll be the first to realize their mistake and put the houses back up for sale. The market will do what it does best, putting these homes in the hands of those most able to make a good profit off them. On the other hand, if single-family rentals turn out to be a good deal for hedge funds we’re likely to see the activity pick up in the future.