Major real estate investors are buying fewer homes in some hot
markets while expanding in others as they race against rising prices to
turn more distressed homes into rentals.
Phoenix, which has led the nation with rapid home-price gains, is among the first markets to see investors' interest cool.
percentage of Phoenix homes bought by investors fell to 28% in November
after cresting at almost 36% in August and is now on a "clear downward"
trend says Mike Orr, real estate expert at the W.P. Carey School of
Business at Arizona State University.
Investor interest also may
be close to "peaking" in some California markets where prices have risen
rapidly because higher acquisition prices cut financial returns, says
John Burns, CEO of Burns Real Estate Consulting.
investors are stepping up purchases elsewhere, especially in
Southeastern cities such as Atlanta and Tampa. Home shoppers there are
now seeing the multiple offers, bidding wars and shrinking supplies of
homes for sale that occurred in Phoenix as investors swooped in.
Phoenix-like phenomenon has migrated to other markets," says Sam
Khater, economist for CoreLogic. It says Phoenix home prices were up 24%
in November year-over-year, vs. 7.4% for the nation.
institutional investors are amassing a $10 billion war chest to pursue
the single-family rental market, estimated JPMorgan Chase in a recent
They're betting that they can get distressed
homes on the cheap, fix them up and rent them out, often to families who
lost homes to foreclosure, and make money on home price appreciation in
a few years.
The companies generally seek three-bedroom, two-bath
homes in the $100,000 to $125,000 range that can rent for more than
$1,000 a month, analysts say.
With $10 billion to spend, that
would roughly equate to 80,000 homes, although the investment funds
continue to raise money, says JPMorgan's analyst Anthony Paolone.
Nationwide, there are currently 12 million single family rentals, most
owned by mom-and-pop investors, Paolone says.
Group, for one, has spent $2.5 billion since early last year buying
16,000 homes. It's now adding 2,500 homes a month, it says. It's
believed to be the biggest player in the group, but most are private, so
information is limited.
Colony Capital expects to invest up to
$150 million a month this year to acquire single-family rentals. It
bought 5,000 homes last year, it says.
Waypoint Homes, one of the
market's pioneers, expects to own 10,000 homes by the year's end. It
started four years ago in the San Francisco Bay Area and owns 3,300
homes, says managing director Doug Brien.
Like many of the big
investors, Blackstone started investing in Phoenix. It next moved into
California, then Atlanta, Tampa, Orlando, Chicago, Las Vegas and
Blackstone has accelerated its buying because home
prices have risen faster than it expected, says Jonathan Gray,
Blackstone's head of real estate. In some markets, the window to buy
before prices rise too much "is closing faster" than in others, he says.
for instance, has slowed purchases in Phoenix. Consultant Burns says
Atlanta is perhaps the hottest investor market now. Local real estate
experts are seeing the impact.
Investors "are a significant force in the market right now," says Mike Prewett, president of Southern REO Associates, Atlanta.
estimates that investors are buying 40% of foreclosed homes in the
Atlanta area, triple the level of a year ago. Almost all foreclosures
for sale draw multiple offers, often 10 or more, Prewett says.
Tampa, too, has seen an uptick, Realtors say.
year ago, $125,000 homes in foreclosure could have been purchased "all
day long," says Brad Monroe, managing broker for Prudential Tropical
Realty in Tampa. "Now, there's 16 offers on each one of them within two
days," many from cash-paying investors.
Tampa's inventory of homes
for sale in December stood at 3.3 months, based on the pace of sales.
That was about half its level of a year earlier, shows data from the
Greater Tampa Association of Realtors. Generally, a 6-month supply is
considered a balanced market between buyers and sellers.
Atlanta's November home prices were up almost 5% from a year ago. Tampa posted a similar gain, CoreLogic says.
Lure of deep slumps
Institutional investors have largely circled cities that were hardest hit by the real estate downturn that started in 2006.
Phoenix, home prices fell almost 60% from their pre-bust peak before
they started to recover. Las Vegas posted a similar drop. Tampa dropped
The markets have more going for them than just cheap
home prices. Phoenix, Tampa, Atlanta and Las Vegas - all markets where
investor buyers are busy - have seen positive year-over-year job growth
since July 2011. That will help drive housing demand, JPMorgan says.
first task for investors is to buy at the right price. In many hard-hit
markets, prices have bounced faster than anyone anticipated even a year
ago. That's made good buys harder to find, says Rick Sharga, executive
vice president with Carrington Mortgage Holdings.
months, Carrington has slowed its buying in single-family rentals,
Sharga says. "As prices go up, it gets harder for investors to get the
returns they're looking for."
In his report, analyst Paolone also
warned that too many investors shopping in the same areas will drive
prices up and eat into rental returns.
Burns says that's already
happening in some places. Single-family rentals that returned 10%
annually three years ago may be now running closer to 6%. That's too low
for some investors, he says.
Nationwide, investors purchased 19%
of homes in November, the National Association of Realtors says, down
from 23% of sales in January and February of last year. December data
will be out Tuesday.
NAR economist Lawrence Yun says the
percentage of homes being purchased by investors may decline more this
year as regular home buyers make up more of the market, assuming a
continued economic recovery.
Burns' data shows investors
accounting for much higher levels of total home sales in some cities. It
also shows a leveling off or decline in recent months in the share of
homes bought by investors in a variety of markets, including Tucson;
Oakland; Tacoma, Wash.; Minneapolis; Washington, D.C.; and Durham, N.C.
also says a peak may be near for Sacramento and Riverside. Both
California cities have seen home prices rise faster than the national
average, CoreLogic data shows.
In November, Sacramento prices were up almost 13% year-over-year. Riverside's were up 10%.
Tight inventories will also slow investors, Burns says.
Sacramento, the inventory of homes for sale fell to 1.6 months in
December, based on the pace of sales, the California Association of
"These guys (investors) have bought up everything that's worth buying in many of the hardest-hit markets" Burns says.
The value of good timing
Even if investors slow purchases in a city, they may circle back around, says Waypoint's Brien.
was late to get to Phoenix, starting purchases there only last year.
But as competitors have slowed buying there, Waypoint has seen "a little
bit better buying opportunity," Brien says.
He expects the same
thing to happen elsewhere. Investors will pull back when prices rise too
fast, then return when price gains slow, as more people list homes for
"There's a lot to buy and a lot to buy attractively," says Justin Chang, Colony Capital principal.
While investor buyers have helped prop up prices, they're making it tougher for regular home shoppers to compete.
and Cyndi Vander Ven have been shopping for a home in Atlanta since
September. The retired couple, both teachers, want to downsize.
lost out on three bids so far, even though they offered more than the
asking price. All of the homes got multiple offers. After bidding on
one, they found out it was being considered as part of a bulk sale to
They would have made more offers by now but other homes they see listed are sold "before we can even move on them," he says.