Investors have flooded the market with rentals, holding down the price.
Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.
Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc., which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.
While private-equity firms are helping real estate values recover from the worst slump since the 1930s by cutting the supply of foreclosures for sale, they’re also crowding the market with rentals. Leases for U.S. apartments rose 3.9 percent in February from a year earlier, more than quadruple the 0.9 percent increase for single-family homes, Trulia said.
“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”
Blackstone, based in New York and the world’s largest private-equity firm, has spent more than $3.5 billion to buy 20,000 single-family rentals, while Tom Barrack’s Santa Monica, California-based Colony Capital has raised $2.2 billion. They rushed to buy houses after prices fell by a third from their July 2006 peak as more families opted to rent after failing to qualify for a mortgage or deciding not to own.
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“Prices have increased off a very low base, and it’s growing increasingly competitive, but we are still finding opportunities to buy,” Devin Peterson, a Blackstone real estate associate overseeing the company’s housing initiative said in a telephone interview from New York. “We recognized that prices were moving faster than people expected. We’d rather be a few weeks behind in completing a rental process than missing out on a few points in home price appreciation.”
The firm last week expanded a credit line led by Deutsche Bank AG to $2.1 billion from $600 million to buy homes.
While large funds accounted for a small fraction of the almost 5 million homes sold last year, their buying spree had an impact on the market, said Kirk McGary, chief executive officer of Real Property Management, a Layton, Utah-based rental company whose franchises in 85 metropolitan areas manage more than $5 billion of single-family homes.
“The institutional people have definitely changed the game,” McGary said in a telephone interview.
Investors flocked to Phoenix after home prices plunged 56 percent from their June 2006 peak to a September 2011 low, according to the SP/Case-Shiller index of home values. Last year, Phoenix rose the most in the 20-city index, making it harder for investors to find bargains then profit from renting.
Prices paid by the largest buyers probably rose more than the broader market because they’re competing to buy similar homes — typically three-bedroom houses built since 1990, said Oliver Chang, co-founder and managing director of Sylvan Road Capital LLC, an Atlanta-based single-family rental investor.
“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.
Investors seeking deals in other cities also face shrinking yields after a jump in prices. Atlanta resale prices climbed 9.9 percent in the 12 months through December, the city’s biggest gain in Case-Shiller data going back to 1991, and Las Vegas prices jumped 13 percent.
Rents on three-bedroom homes averaged 65 cents a square foot in Atlanta in last year’s fourth quarter, up 1.6 percent from the same period in 2011, while Las Vegas rents fell 4.1 percent to a median 70 cents a square foot over the same timeframe, according to RentRange LLC, a Westminster, Colorado- based single-family rental data provider.
Slowing rents and rising purchase prices come as investment funds turn to public markets to raise capital and investors seek more opportunities to place bets on a housing recovery. Home values rose 6.8 percent last year, the biggest 12-month gain since July 2006, according to Case-Shiller data.
Prices may rise 7 percent this year and more than 14 percent through 2015, according to JPMorgan Chase Co., as the Federal Reserve buys mortgage bonds to push down borrowing costs, investors seek ways to generate yield, and buyers compete for a dwindling pool of available homes.
More than 5 million former owners have lost their properties to foreclosure or in a distressed sale since home prices peaked in 2006, data from RealtyTrac show. Last year, the total number of renter-occupied residences increased 1.1 million, while the number of owner-occupied households fell by 106,000, according to a Commerce Department report.
The apartment market has remained strong even as single- family home rental supply increases, in part, because the properties appeal to different tenants, said Greg Willett, vice president of MPF Research, a Carrollton, Texas-based apartment- data firm. While apartments attract young single people, houses draw in families, he said.
Over the last three decades, rents and home prices increased in parallel at an average annual rate of 3 percent, said Jade Rahmani, an analyst with Keefe Bruyette Woods Inc. That may change temporarily as investors pour money into rentals.
“One of the risks is prices run up and therefore the rental economics don’t justify the business model,” Rahmani, who has an outperform rating on Silver Bay and Colony, the equivalent of a buy recommendation, said in a telephone interview from New York. “The problem could be that you would have assets that are up a lot in value, which isn’t the worst thing in the world. The risk would be that everybody goes to sell at the same time.”
That hasn’t happened yet, according to Orr. The supply of for-sale homes has changed little in Phoenix since February 2012, he wrote in a March 8 report. What’s changed are the increased number of homes listed for more than $150,000, along with a 38 percent decline in listings of bank-owned homes and short sales, where the asking price is below the amount owed, Orr wrote.
Bloomberg