Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

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

By Amanda Alix - Mar 1, 2014 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street money bought up millions of single family homes over the past few years, but the bloom may be off the rose

It wasn't very long ago that Wall Street heavies like the Blackstone Group ( BX ) and new market entries like B. Wayne Hughes' American Homes 4 Rent ( AMH -1.38% ) 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 ( 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Blackstone Group L.P. Stock Quote
The Blackstone Group L.P.
BX
American Homes 4 Rent Stock Quote
American Homes 4 Rent
AMH
$40.09 (-1.38%) $0.56
Front Yard Residential Corporation Stock Quote
Front Yard Residential Corporation
RESI
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$380.99 (-1.44%) $-5.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.