The first wave came during the housing bust when large private-equity firms acquired tens of thousands of single-family homes out of foreclosure for cents on the dollar. The biggest players have since been sold off to the public as REITs, such as Blackstone’s Invitation Homes which owns about 48,000 rental houses.
Blackstone was the trailblazer in financializing rents. It issued the first rent-backed structured securities in November 2013. This has become a common funding mechanism. And shortly before the Invitation Homes IPO, it obtained Fannie Mae guarantees for $1 billion in rental-home mortgage-backed securities.
This second wave is different. PE firms are paying prices at the peak of the market, amid ceaseless complaints that there isn’t enough inventory of homes for sale, for folks who actually want to live in the homes they buy.
And these are just the biggest players. There are thousands of smaller players. And all but mom-and-pop investors pay cash and then fund the purchases with leverage at the institutional level.
Here’s the new wave of Big Money:
August 22: Amherst Holdings, which bills itself as a “financial services holding company with expertise in the real estate, mortgage and related structured finance markets,” is planning to raise $1 billion to buy single-family homes and rent them out.
The new fund has a term of over 10 years to allow it to stay in this business over the longer term, the sources told Bloomberg. A fund with a shorter term, which are typical, would exit the investments after a few years via an IPO or sale and return funds to investors. This term of over 10 years could also be an indication that the next housing downturn is being figured into the plan, and the duration of the fund is designed to extend past it in order to avoid having to exit at a bad moment.
The fund may be in addition to the $600 million Amherst raised for a single-family rental fund that recently closed after fundraising goals had been reached.
According to its website, Amherst has already raised “more than $2.5 billion” since 2012 to invest in single-family rental homes and related activities. According to Bloomberg, its subsidiary, Main Street Renewal, already operates over 20,000 rental houses.
August 20: Cerberus Capital Management is said to be raising over $500 million to buy single-family rental homes. This fund doesn’t have a term date at all, perhaps for similar reasons as above, such as getting through the next housing bust without having to exit possibly at the worst time.
A subsidiary of Cerberus, FirstKey Homes, already operated 11,000 rental homes at the end of 2017. In February, FirstKey CEO Martin Esteverena said the company wants to build a portfolio of over 40,000 single-family rental homes.
Most recently, Cerberus also bought about 200 homes in Miami-Dade, Broward and Palm Beach in July from Property Investment Advisors Group, a Miami-based PE firm, for $47 million. Property Investment Advisors, incidentally, will use the proceeds to buy multifamily properties.
August 9: Front Yard Residential Corp., a publicly traded REIT (RESI), announced that it acquired HavenBrook Partners LLC and its portfolio of 3,236 homes from PIMCO. These kinds of deals are heavily concentrated in some areas. For example, this deal includes 325 single-family rental homes in Broward County, Florida.
The deal was facilitated by a $509 million loan that Berkadia, a joint venture of Berkshire Hathaway and Jefferies Financial Group, originated and subsequently sold to Freddie Mac, a GSE.
“We’re growing the size of the company… and one of the GSEs gave us the money. That’s a good day,” explained Front Yard CEO George Ellison.
Front Yard was tangled up in the investigation by the New York Department of Financial Services of Ocwen Financial, the largest servicer of subprime loans in the US.
At the time, Front Yard was called Altisource Residential. Ocwen’s founder, William Erbey, was also chairman of Altisource. In 2014, Ocwen entered into a consent decree with the New York Department of Financial Services that named Altisource as “related party.” Erbey was forced to resign as chairman of Altisource. As part of the consent decree, Ocwen agreed to pay $100 million in fines and $150 million in restitution.
July 9: Pretium Partners – a PE firm founded in 2012 that now has $10 billion in assets – announced that it had closed its new fund after reaching its fundraising goal of over $1 billion. The new fund will acquire, renovate, and rent high-quality single-family homes. It said that over 5,000 homes have already been acquired by this fund.
A prior fund, which had raised $1.2 billion in 2013, is also in this business. Pretium says it’s the largest private landlord of single-family rental homes in the US, operating over 26,000 homes in15 markets. The largest landlords are publicly traded REITs.
June 28: Tricon Capital Group announced a $2-billion joint venture with the Teacher Retirement System of Texas and Singapore’s sovereign wealth fund, GIC, consisting of $750 million in equity ($250 million from each) and $1.25 billion in leverage, to buy 10,000 to 12,000 single-family rental homes over the next three years, to be managed by Tricon’s American Homes platform.
Bernanke started it.
This big business of buying massive numbers of single-family homes and financializing rents got started in late 2011, initiated and supported by the Federal Reserve as part of its efforts to “heal” the housing market. Then-chairman Ben Bernanke pitched this in various talks. The Atlanta Fed, while lamenting soaring eviction rates at some of the mega-landlords, summarized this beautifully in January 2017:
In unwinding their bank-owned properties, the GSEs [Fannie Mae, Freddy Mac, etc.], U.S. Treasury, and Federal Reserve innovated new structured transactions for disposing of hundreds of thousands of bank-owned homes, also known as real estate owned (REO).
The Federal Reserve was the first to suggest that private equity firms were the one group with cash on hand to invest in foreclosed homes (Bernanke, 2012).
In 2012, the Federal Housing Finance Agency (FHFA), conservator of the GSEs, issued a pilot to develop structured transactions that could be used to sell its REO homes in bulk. The private market followed by developing and standardizing financial instruments to allow broader market investment in converting foreclosed homes into single-family rentals. Rental housing, traditionally the purview of mom-and-pop landlords, caught the attention of large financial firms.
This Bernanke-triggered first wave of PE firms ended up buying about 350,000 homes, concentrated in a relatively small number of markets. After that wave, activity subsided somewhat. But now the second wave is washing over the housing market, but under entirely different conditions: peak home prices and rising interest rates.
The rent is just too darn high in these U.S. cities
Miami has the highest cost burden among the biggest metros, but California has the most cost-burdened households. (Graphic: David Foster/Yahoo Finance)
The cost of rent in the U.S., particularly in certain metro areas, is too darn high.
Nearly half of U.S. rental households are spending more than the recommended 30% of their income on rent, according to a report from Apartment List. (The national rate went from 49.5% in 2017 to 49.7% in 2018.)
And according to Apartment List, “in 19 of the nation’s 25 largest metros, a household earning the median renter income would be cost-burdened by the median rent. Of the 100 largest metros, the median renter would be burdened in 64 metros.”
Among the biggest metros in the U.S., Miami has the highest cost burden rate at 62.7% — this means that 62.7% of its renters are spending more than the recommended 30% on rent. Not far behind is New Orleans at 60.1% The two largest metros in the U.S. by population, New York and Los Angeles, are at 52.2% and 56.9% respectively. Given their size, NYC and LA house the highest number of cost-burdened individuals.
“Certainly, the worst offenders — places like Los Angeles, Boston, San Diego, Miami — these are places where it’s not always easy to build as many houses as you’d like, but also their economies have been very strong, so the increases in rental [costs] become an unfortunate byproduct of that,” Igor Popov, chief economist at Apartment List, told Yahoo Finance.
By state, Florida has the highest cost burden rate at 56.5%. Other high cost-burdened states include New York, New Jersey, California, Colorado, Louisiana, and Connecticut — notably places along the coasts.
“We’re seeing that especially coastal cities — where adding new housing is difficult but economies are booming — those are the places where affordability issues are stacking up the most,” Popov said. “With that said, it is a national problem so even cities that aren’t necessarily in the housing affordability debate every day still have a lot of renters who are struggling.”
Supply and demand
Then there is San Francisco, which has a cost burden rate below the national average — despite the fact that the city has the highest rent in the country. This is because of rent control, Popov explained.
“A lot of the people who are able to live and rent in San Francisco are ones that have been in rent-controlled apartments for some time,” he said. “And so a good chunk of the city is covered by rent control. When you look at who’s actually able to rent in the market, a lot of families are able to afford it because they are basically paying below market rates.”
He continued: “The market rates in San Francisco are essentially the highest in the country. If you’re just moving to San Francisco and looking for an apartment, the prices are very high. But formally, the majority of people that are able to comfortably add rent are the ones who aren’t paying the market rate, but are usually in a rent-controlled apartment. Rent control often plays a role in these affordability numbers, often driving a wedge between the market rate that a new resident would pay, versus the rent-controlled rate the existing residents pay.”
Vineland, New Jersey, has the highest cost burden rate. (Graphic: David Foster/Yahoo Finance)
Because of high rents in many of these cities, residents often turn to surrounding areas to reside for more financially feasible places to live. This is the case of Riverside, Calif., a city near Los Angeles, where the median rent accounts for approximately 36% of a person’s income.
“Riverside is actually seeing a lot of people who are migrating from the LA metro in search of more affordable options, but that demand is, in turn, driving up the price there as well,” Popov said.
‘I guess we went in the wrong direction’
Supply and demand wasn’t the only factor that affected the increase in rent-burdened households last year. Rental increases also outpaced wage growth in 2018, the first time since 2011.
“There’s a lot of factors for why that might be but on a very macro level, I think this economic expansion has been one that hasn’t [benefited] low-income households very well,” Popov said. “That shift was a bit surprising especially given that … we’ve seen a lot of high-income renters flooding in the rental market. In some ways, they’ve been padding the stats, so to speak, because they’ve come in and they’ve typically been able to afford their rentals, so they’ve made it look like things are getting better but this year, I guess we went in the wrong direction.”
From 2017 to 2018, there were nearly 300,000 more cost-burdened rental households throughout the U.S., which Popov described as “a big change in the number of people that have gone from being able to afford their housing to technically living in a place that they’re unable to afford.”
“You risk them moving away and that could both affect the economy and the economic diversity of a city when the renters move away, and you risk not being able to attract talent to grow the economy, and you risk not having basically that next generation being able to come and move to the city to keep it vibrant,” Popov said. “I think of this on a city-by-city basis and on that level, there are a lot of markets where maybe the flag isn’t being raised for the first time — maybe it’s been raised for a while.”