The Foreclosure-to-Rental Business Shows Signs of Wear and Tear

It wasn't very long ago that Wall Street heavies like the Blackstone Group (NYSE: BX  ) and new market entries like B. Wayne Hughes' American Homes 4 Rent (NYSE: AMH  ) were lapping up thousands of single-family foreclosures across the country each month, rehabilitating them and renting them out – sometimes to the previous owners.

Blackstone spent $2.5 billion in 2012 to purchase 16,000 such homes, swelling its portfolio of rentals to approximately 200,000 properties, while newcomer American Homes holds 21,000. It seemed that there was no slowdown in sight, and two brand new real estate investment trusts were born early last year to take advantage of this nascent market: Silver Bay Realty (NYSE: SBY  ) and Altisource Residential (NYSE: RESI  ) .

A previously hot market is experiencing a chill
By the end of 2013, however, the foreclosure-to-rental model began to stall. In the formerly fertile Tampa Bay, Florida market, Blackstone's Invitation Homes, Silver Bay, and American Homes 4 Rent all decreased spending by 50% over a six-month period from spring to fall.

Now, the rental payment bond sales that grew out of the foreclosure-purchasing business – the proceeds of which helped to fund new spending sprees – are losing traction, too. The keen interest that greeted Blackstone's first securitization offering last November seems to have waned, even as American Homes works with Goldman Sachs to launch its own rental payment bond. Just this past December, analysts at Credit Suisse opined that the rental securitization market could hit $5 billion this year.

That prediction may not pan out. Since October, rents backing Blackstone's November offering dropped by 7.6% between October and January, as more vacant properties failed to carry their weight.

A new era?
It seems that the single-family business model may be wearing itself out. Fewer foreclosures on the market, along with rising house prices, have held back the previously feverish pace of growth. Faced with fewer brick-and-mortar prospects, institutional investors are now purchasing the nonperforming loans that back the 2.2 million home loans that are either delinquent or actually in foreclosure.

Buying batches of NPLs from banks and the federal government is a market that could reach $40 billion in 2014 , and allows these companies access to distressed properties at a discount of 65% to 80% of property values. Big players in this area are American Homes and Altisource Residential, while Blackstone has announced that it has no plans to join in.

Is this business model beginning to wind down? It certainly looks like that might be the case. Of course, the idea was somewhat self-limiting to start with; the ultimate irony is that the industry itself is likely a big part of the cause of its own demise. For its part, Silver Bay doesn't seem overly concerned with a lack of available properties – it recently announced that it has increased its borrowing capacity to $350 million from $200 million in order to take advantage of what it sees as still-favorable market conditions.

None of the companies seem to be selling the homes in their portfolios, so the rental part of the model still seems intact, at least for the time being. As the opportunities to add to the empires of these companies dwindle, however, it may eventually come down to these entities buying each other – rather than foreclosed-upon single-family abodes.

Tried-and-true stock picks
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2850417, ~/Articles/ArticleHandler.aspx, 10/24/2014 8:24:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement