I have been more bullish than not (with some reservations) on housing, thinking that a combination of investment sales and pent up demand will eat it into the available supply, helping put a floor under real estate asset prices. I have to do some work on this one, but there is some evidence that rental demand may drying up. This is an excerpt from an article on the Big Picture blog.
Summary…”If you buy it, they may not rent it…at the price you thought or need”
A side of the “flood of investors sucking up all the supply” story that nobody is talking about…weakening rental demand. Phoenix cap rates projected to be between 1.75% and 4% at present (unless you do all the maintenance yourself). With caps this low, one may as well buy INTC or lever up 10 year notes at 1.9% and take far less risk than buying the tail end of a Twist-induced housing market short squeeze on the verge of a ‘consolidation’.
Weak national rental demand — relative to the flood of rental single family and multi-unit supply coming on line – is a potential 2013 US housing market theme that will take it’s toll on landlords, REITs, institution investors, house prices, price/rent ratios, relative affordability, loan default & mod redefault rates (as the millions on the default fence or in high leverage mods decide it’s better to de-lever and rent), and ultimately the full blown housing recovery thesis now fully factored into every macro economic and investment models out a decade into the future.
Do you remember looking at ‘opportunity fund’ capital raising slide decks a couple of years ago? A central thesis to the ‘buy and rent’ trade was not only historic low rates forever but millions upon millions more foreclosures for the next several years and all of those former homeowners needing a place to rent. On the rates side, they nailed it. But on the rental demand side, the exact opposite happened. As every insti and private investor – domestic and foreign – was buying up all low-end and distressed house in the country the banks and government made 8 million loan mods and workouts turning homeowners into renters of their own home. And they made it virtually illegal to foreclose too boot. As foreclosures hit a pre-crisis low in 2012 rental demand has been by and large dictated by good ol macro economic factors such as jobs, income, tax rates, energy costs etc, none of which are screaming in the direction of more demand and higher rents.
Not to take any readers away from the Big Picture, the rest can be found here.
Summary…”If you buy it, they may not rent it…at the price you thought or need”
A side of the “flood of investors sucking up all the supply” story that nobody is talking about…weakening rental demand. Phoenix cap rates projected to be between 1.75% and 4% at present (unless you do all the maintenance yourself). With caps this low, one may as well buy INTC or lever up 10 year notes at 1.9% and take far less risk than buying the tail end of a Twist-induced housing market short squeeze on the verge of a ‘consolidation’.
Weak national rental demand — relative to the flood of rental single family and multi-unit supply coming on line – is a potential 2013 US housing market theme that will take it’s toll on landlords, REITs, institution investors, house prices, price/rent ratios, relative affordability, loan default & mod redefault rates (as the millions on the default fence or in high leverage mods decide it’s better to de-lever and rent), and ultimately the full blown housing recovery thesis now fully factored into every macro economic and investment models out a decade into the future.
Do you remember looking at ‘opportunity fund’ capital raising slide decks a couple of years ago? A central thesis to the ‘buy and rent’ trade was not only historic low rates forever but millions upon millions more foreclosures for the next several years and all of those former homeowners needing a place to rent. On the rates side, they nailed it. But on the rental demand side, the exact opposite happened. As every insti and private investor – domestic and foreign – was buying up all low-end and distressed house in the country the banks and government made 8 million loan mods and workouts turning homeowners into renters of their own home. And they made it virtually illegal to foreclose too boot. As foreclosures hit a pre-crisis low in 2012 rental demand has been by and large dictated by good ol macro economic factors such as jobs, income, tax rates, energy costs etc, none of which are screaming in the direction of more demand and higher rents.
Not to take any readers away from the Big Picture, the rest can be found here.
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