As after the last crisis, fueled by ultra-cheap money, they’re taking financialization of the housing market to the next level: Now it’s buy-to-rent, build-to-rent, sale-leasebacks, and buy-to-sell.
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube or download it wherever you get your podcasts.
In many parts of the country, house buying has turned into a drunken land rush. Sales of new houses in August jumped 45% from a year ago, after having jumped 50% in July, to the highest sales rate since 2006, which was the end of the prior housing bubble. Sales of existing homes jumped to the highest rate since early 2007, particularly concentrated on single family houses.
This land rush has been ascribed to different factors, including people leaving rental apartments in big cities to move to the suburbs or exurbs; people suddenly deciding to start families; people – especially those that benefited from the crisis and made a killing with the Fed’s schemes – buying a second home outside the city; and people buying a home in a hurry without selling their old home first, hoping for a higher price later.
And this is happening during a massive unemployment crisis; a time when 7% of all mortgages have been moved into forbearance; a time when 17% of the FHA-insured mortgages are 30 days or more delinquent, though many of those loans have also been moved into forbearance and put on ice.
Clearly the housing market has split into two, with one part being red hot, and the other part crumbling before our eyes.
But there is something else going on too: A surge in big money into single family houses as an asset class.
This is now taking different forms: There are the buy-to-rent companies that grew out of the Financial Crisis. And there are companies that are now building new houses specifically as rental houses; and there are the iBuyers – companies that buy houses to then sell them, a business model that is intended to replace the brokerage model though it has done nothing but lose money, but no problem. And then there are companies buying houses and leasing them back to the former homeowners so that they can resolve a mortgage delinquency without having to move.
And these companies have raised many billions of dollars since April in the capital markets that have gone totally nuts.
Homebuilder ResiBuild was set up specifically to build houses as rental properties. The Atlanta-based company is now raising $1.2 billion, including $400 million in equity and $800 million in debt, to build 5,000 houses with three or four bedrooms and a two-car garage that rent for about $1,850 a month. And it plans to manage those rentals.
Co-founder Jay Byce comes out of Colony Capital, which got into the buy-to-rent business that the Fed so hotly encouraged during the mortgage crisis in 2011 and 2012, where these companies with cheaply borrowed billions of dollars swooped in and bought tens of thousands of houses out of foreclosure to then rent them out.
Jay Byce told Bloomberg: “We were already seeing both boomers and millennials move to rental communities because they wanted more room and a low-maintenance lifestyle. Covid has accelerated the shifts that were already happening.”
The theory is that people want more space and live in the suburbs but want to rent instead of owning.
On its website, ResiBuild says that it wants “to make the dream of living in a NEW home a reality for everyone. Our mission is to provide quality homes in desirable areas that are affordably priced for today’s renters, using the most modern, efficient, and customer-focused homebuilding strategies to achieve this.”
And private equity firms are once again chasing after the buy-to-rent market. This includes the asset management division of JPMorgan that nearly tripled the size of its joint venture with American Homes 4 Rent, to $650 million.
American Homes 4 Rent is a buy-to-rent outfit that grew out of the mortgage crisis and the Fed’s efforts to resolve it without taking down the banks. It already owns about 53,000 houses. And it raised an additional $400 million in a stock offering.
American Homes 4 Rent is not only buying houses in the market, it is also now massively building NEW houses specifically to rent, and has become one of the most-active homebuilders in recent months.
Bookfield Asset Management set up a fund to get into the rental house market.
Blackstone Group, which started Invitation Homes during the mortgage crisis and then sent it on its way in an IPO and has since then cashed out, now invested $300 million in Tricon Residential Inc., which owns over 30,000 single-family and multifamily units in the US and Canada.
Invitation Homes, the largest buy-to-rent outfit with 80,000 single-family rental houses, raised an additional $400 million in a stock offering in June, and is buying houses at a rate of about $200 million every three months.
These buy-to-rent companies have also raised almost $6 billion by selling rent-backed structured securities, including three big deals in September, according to Kroll Bond Rating Agency.
Despite the malaise in the big-city rental apartment sector, the buy-to-rent companies, such as Invitation Homes, have reported record high occupancy rates and on-time rent collections that are roughly in line with pre-Covid averages.
Invitation Homes said in an investor presentation in September that it would be getting into the sale-leaseback market – buying single-family houses from homeowners and leasing them back to the former homeowners, who would do this to cash out without having to move.
The sale-leaseback method of raising cash has been practiced for a long time by owners of commercial property, airplanes, equipment, etc. But in terms of single-family houses, it’s fairly new.
But now there is a different angle to the sale-leaseback model, that is totally new: 7% of the mortgages are in forbearance and others are delinquent but are at the moment protected by a moratorium on foreclosures. These homeowners will eventually have to deal with reality, which could mean a forced sale or foreclosure.
But with a sale-leaseback, they could sell the home and lease it back, so they’d become renters and wouldn’t have to move. Startups are getting into this deal, raising lots of money to do this.
In other words, companies are lining up to take advantage of the mess that will ensue when the forbearance period and the foreclosure moratorium end, which is when these mortgages become officially delinquent and face foreclosure – and it will produce another wave of homes being taken over by investors and becoming an asset class.
Then there are the iBuyers, such as Zillow, Opendoor, Redfin, and others. Zillow and Redfin are already publicly traded and got into the iBuyer craze as an additional activity. They both have booked losses every year, and since they started getting into the iBuyer craze, those losses increased.
But with these crazy stock and bond markets, they can raise funds, no problem. Zillow’s shares more than quadrupled over the past year, despite the losses, and its market capitalization reached $25 billion.
Opendoor is a dedicated iBuyer. It’s going public via merger with a special purpose acquisition company – a SPAC — that values Opendoor at $4.8 billion, after it raises an additional $1 billion. This comes on top of the nearly $3 billion Opendoor has raised from prior investors, including SoftBank. Opendoor has been losing tons of money, but it doesn’t matter as long as investors are willing to supply more money.
So now these huge amounts of money are playing in various ways in the market for single-family houses, throwing many billions of dollars at it, some of them to buy-to-rent, others to build-to-rent, others with sale-leaseback programs, and others again to buy-to-sell.
The funding for all these activities come from share offerings, from bond offerings, from institutional investors investing billions of dollars directly into privately held companies, and from selling rent-backed securities, and so on.
As it happened after the Financial Crisis, when the Fed promoted the buy-to-rent programs to its favorite private equity firms and helped them fund the purchases with ultra-cheap money, we now have another crisis during which the Fed has produced ultra-cheap money and is encouraging the next leg in the financialization of the housing market, leading to vast concentration in ownership of houses and housing market activity.
Fueled by cheap money from the Fed, following another crisis, the Big Boys Are Back, bigger and broader than before. And the financialization of the single-family housing market is now progressing to the next level. You can listen and subscribe to THE WOLF STREET REPORT on YouTube or download it wherever you get your podcasts.
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