STOCK MARKET WATCH -- Monday, 2 March 2015

[Demeter]

5. Housing Industry Frets About the Next Brick to Drop Wolf Richter

http://www.zerohedge.com/news/2015-03-01/housing-industry-frets-about-next-brick-drop

Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year. The PE firm’s subsidiary Invitation Homes, doped with nearly free money the Fed’s policies have made available to Wall Street, has become America’s number one mega-landlord in the span of three years by buying up 46,000 vacant single-family homes in 14 metro areas, initially at a rate of $100 million per week, now reduced to $35 million per week. As of September 30, Invitation Homes had $8.7 billion worth of homes on its balance sheet, followed by American Homes 4 Rent ($5.5 billion), Colony Financial ($3.4 billion), and Waypoint ($2.6 billion). Those are the top four. Countless smaller investors also jumped into the fray. Together they scooped up several hundred thousand single-family houses.

A “bet on America,” is what Schwarzman called the splurge two years ago.

The bet was to buy vacant homes out of foreclosure, outbidding potential homeowners who’d actually live in them, but who were hobbled by their need for mortgages in cash-only auctions. The PE firms were initially focused only on a handful of cities. Each wave of these concentrated purchases ratcheted up the prices of all other homes through the multiplier effect. Homeowners at the time loved it as the price of their home re-soared. The effect rippled across the country and added about $7 trillion to homeowners’ wealth since 2011, doubling equity to $14 trillion. But it pulled the rug out from under first-time buyers. Now, only the ludicrously low Fed-engineered interest rates allow regular people – the lucky ones – to buy a home at all. The rest are renting, in a world where rents are ballooning and wages are stagnating.

Thanks to the ratchet effect, whereby each PE firm helped drive up prices for the others, the top four landlords booked a 23% gain on equity so far, with Invitation Homes alone showing $523 million in gains, according to RealtyTrac. The “bet on America” has been an awesome ride. But now what? PE firms need to exit their investments. It’s their business model. With home prices in certain markets exceeding the crazy bubble prices of 2006, it’s a great time to cash out. RealtyTrac VP Daren Blomquist told American Banker that small batches of investor-owned properties have already started to show up in the listings, and some investors might be preparing for larger liquidations.

“It is a very big concern for real estate professionals,” he said. “They are asking what the impact will be if investors liquidate directly onto the market.”

But larger firms might not dump these houses on the market unless they have to. American Banker reported that Blackstone will likely cash out of Invitation Homes by spinning it off to the public, according to “bankers close to the Industry.” After less than two years in this business, Ellington Management Group exited by selling its portfolio of 900 houses to American Homes 4 Rent for a 26% premium over cost, after giving up on its earlier idea of an IPO. In July, Beazer Pre-Owned Rental Homes had exited the business by selling its 1,300 houses to American Homes 4 Rent, at the time still flush with cash from its IPO a year earlier. Such portfolio sales maintain the homes as rentals. But smaller firms are more likely to cash out by putting their houses on the market, Blomquist said. And they have already started the process. Now the industry is fretting that liquidations by investors could unravel the easy Fed-engineered gains of the last few years. Sure, it would help first-time buyers and perhaps put a halt to the plunging homeownership rates in the US. But the industry wants prices to rise. Period.

When large landlords start putting thousands of homes up for sale, it could get messy. It would leave tenants scrambling to find alternatives, and some might get stranded. A forest of for-sale signs would re-pop up in the very neighborhoods that these landlords had targeted during the buying binge. Each wave of selling would have the reverse ratchet effect. And the industry’s dream of forever rising prices would be threatened....

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And getting out of the bet on China? China has long frustrated the hard-landing watchers. But maybe not much longer. Read… Housing Crash in China Steeper than in Pre-Lehman America.